Academic journal article IUP Journal of Applied Finance

Banking, Stock Market and Economic Growth in Four ASEAN Countries: Evidence from Linear and Nonlinear Methods

Academic journal article IUP Journal of Applied Finance

Banking, Stock Market and Economic Growth in Four ASEAN Countries: Evidence from Linear and Nonlinear Methods

Article excerpt

(ProQuest: ... denotes formulae omitted.)

Introduction

In theoretical studies, the relationship between financial development and economic growth can be classified into three major categories. The first category is finance-led growth where a well-developed financial system allocates financial resources to most productive use and thus enhances the economic growth (Schumpeter, 1912). The second category is growth-led finance where bank does not impact growth and the development of bank follows economic growth given that the expansion of economic growth increases the demand for services provided by the institution (Robinson, 1952). The last category is the absence of significant causal relationship between bank and economic growth due to the relationship between variables being exaggerated by researchers (Lucas, 1988).

In empirical studies, researchers have observed four directions of causality: first, there is a significant causal relationship from bank to economic growth (Aretis et al., 2001; Majid and Mahrizal, 2007; and Hsueh et al., 2013). Second, there is a significant causality from economic growth to bank (Ang and McKibbin, 2007). Third, there is no causal relationship between bank and economic growth (Tang, 2005; Naceur and Ghazouani, 2007; and Mukherjee, 2013). Fourth, there is a bidirectional causal relationship between bank and economic growth (Demetriades and Hussein, 1996; and Calderon and Liu, 2003).

Existing literatures in ASEAN countries mostly focus on the role of the banking sector rather than stock market in economic growth. Some researchers state that the role of the stock market is not the main factor in enhancing economic growth in these countries (Ang and McKibbin, 2007; and Hsueh et al., 2013). This is because most of the stock markets in ASEAN countries are still immature with many firms not listed and choosing banks rather than stock market as their main financing source. However, Colombage (2009) finds the role of stock market vital in promoting economic growth in advanced economies. Enisan and Olufisayo (2009) also find a significant causal relationship between stock market and economic growth in seven sub-saharan African countries. Furthermore, the result in this study also finds that stock market plays a vital role in stimulating economic growth in Malaysia, Thailand and the Philippines.

However, the causal relationship between bank and economic growth is still inconclusive due to unsatisfactory indicators to measure bank (Thangavelu and Ang, 2004; Ang and McKibbin, 2007; and Ang, 2008) and the indicators adopted in empirical studies are still unsuitable to measure the functions carried out by the banking sector. Studies have suggested that the best indicators to measure these functions include mobilizing savings, risk management, allocating resources, liquidity, and exercising corporate control. However, there is no single indicator to measure all these functions.

King and Levine (1993) suggest the use of more indicators as each one would have its own strengths and weaknesses. For example, liquid liabilities only measure the bank in terms of mobilizing savings or the pure size of the banking system. However, this indicator does not show how the bank can diversify risk and information processing. The indicator for ratio of deposit money bank assets to sum of deposit money bank plus central bank assets is therefore employed for this purpose. This indicator considers the bank in diversifying risk and information processing but does not measure to whom the bank allocates that credit. Therefore, private credit by deposit money bank assets is adopted to measure the funds allocated from the bank to the private sector only which is able to utilize the funds in a more efficient and productive manner compared to the public sector. Since every indicator would have its own strengths and weaknesses, the authors suggest the inclusion of more indicators in order to give a richer picture of bank development. …

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