Causal Nexus between Financial Integration and Economic Growth : Does Nonlinearity Matter?

Abstract

Empirical studies that rely on a linear framework typically fail to find evidence of a causal link between financial integration and economic growth. In this study, we extend the analysis by applying both linear and nonlinear Granger-causality tests to data for 19 emerging and developing countries. Consistent with previous research, the linear causality analysis reveals only weak causal linkages between financial integration and economic growth. In contrast, the nonlinear causality analysis provides evidence of significant nonlinear causality in 18 out of 19 countries. The growth hypothesis holds true for Argentina, Bolivia, Colombia, Morocco, Tunisia, and Venezuela whereas a reverse relation was found in Brazil, Chile,

Does stock market capitalization cause GDP? A causality study for Central and Eastern European countries

“…And finally, we analyze the Toda-Yamamoto approach (Toda and Yamamoto, 1995). These authors step forward with the Granger causality approach and use the modified Wald test (MWALD), based on a VAR(k + d max ) model where k is the optimal order of system lags, and d max is the maximum order of model integration (Saafi et al, 2016). This approach includes additional lags to consider the non-stationarity of the series, and the number of additional lags is based on the order of integration of the series.…”

“…The VAR can be used in non-stationary series (Andersson et al, 2016). Saafi et al (2016) used this approach to analyze causality between financial integration and economic growth for a group of 19 developing and developed countries. Andersson et al (2016) analyzed causality between the banking sector and Chinese economic growth with the Toda-Yamamoto approach.…”

Do economic and financial integration stimulate economic growth? A critical survey

“…Methodologically, the impact of financial integration on economic growth could differ between linear or non-linear frameworks. Saafi et al (2016) investigated the causal relationship between financial integration and economic growth within linear and non-linear frameworks in 19 developing and emerging economies. In the linear causality analysis, the study found a weak causal relationship between integration and growth.…”

“…Hence, several developing and emerging economies have embarked on a rapid process of financial integration in the past few decades. This is because financial integration has the capacity to promote capital allocation, production specialization, international consumption risk-sharing, and economic growth (Acemoglu & Zilibotti, 1997;Gehringer, 2015;Obstfeld, 1994;Saafi et al, 2016). Besides, financial integration improves factor productivity via greater efficiency in resources allocation and easy access to investment opportunities thereby stimulating economic growth (Edison et al, 2002;Gehringer, 2013;Giannetti et al, 2002).…”

Financial Integration and Economic Growth: Should Asia Emulate Europe?

“…Interestingly, Prasad et al (2007) In the case of developing countries, the integration-growth nexus is found to be unclear (Eichengreen 2002, Saafi et al 2016. Despite the limited work on the region, the financial integration process has been widely debated across Asia, Middle East, and Latin America.…”