Bank-based financial development and economic growth

Sheilla Nyasha and Nicholas Odhiambo

Journal of Financial Economic Policy, 2014, vol. 6, issue 2, 112-132

Abstract: Purpose - – The purpose of this paper was to survey the existing literature on the causal relationship between bank-based financial development and economic growth, highlighting the theoretical and empirical evidence from recent work. Although some previous studies have attempted to conduct a survey of the existing research on the finance-growth nexus, the majority of these studies have failed to distinguish between bank-based and market-based financial developments. To our knowledge, this may be the first study of its kind to survey the existing research on the causal relationship between bank-based financial development and economic growth – in both developed and developing countries. Design/methodology/approach - – Overall, our study shows that most of the literature reviewed in this paper either supports bidirectional causality between bank-based financial development and economic growth or reinforces the conventional supply-leading response phenomenon. Notwithstanding this outcome, the study also finds the literature in favour of a demand-following response to be increasing – in both number and substance – especially in recent years. Findings - – The paper, therefore, concludes that the causal relationship between financial development and economic growth is not clear-cut and that the notion that financial development automatically leads to economic growth is merely based onprima facieor superficial evidence. Originality/value - – Although some previous studies have attempted to conduct a survey of the existing research on the finance-growth nexus, the majority of these studies have failed to distinguish between bank-based and market-based financial developments. To our knowledge, this may be the first study of its kind to survey the existing research on the causal relationship between bank-based financial development and economic growth – in both developed and developing countries.

Keywords: Economic growth; Causality; Bank-based financial development; Supply-leading; Demand-following; Bi-directional; G20; A12 (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (10)

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Persistent link: https://EconPapers.repec.org/RePEc:eme:jfeppp:v:6:y:2014:i:2:p:112-132

DOI: 10.1108/JFEP-07-2013-0031

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