Financial Deepening and Economic Growth in Advanced and Emerging Economies

Abstract

While over‐financing caused crises and slow growth in advanced economies including Germany, France and the UK after 2008, more prudent financial deepening sustained higher economic growth in China and India—two major emerging economies in the world. The actual financial deepening ratios (AFDR) observed in the non‐consolidated balance sheet from the OECD exceeded by factors of 3.5, 2.4 and 5.1 the optimal financial deepening ratios (OFDR) obtained from the solutions of dynamic general equilibrium (DGE) models of those three advanced economies. The corresponding factors were 2.3 and 0.49 for China and India respectively. Labor intensive production technology and a low OFDR relative to a high AFDR in China allowed it to grow at 10% between 1990 and 2010 period that ended with the global financial crisis. With a reasonable OFDR and low AFDR India also managed to grow at 6.5%. Thus huge gaps between the optimal and actual financial deepening ratios led to massive macroeconomic consequences as observed after the crises in 2008. Smooth, sustainable and efficient economic growth requires adoption of strategies for separating equilibria in line of Miller–Stiglitz–Roth mechanisms avoiding problems of asymmetric information in the process of financial intermediation with as narrower gaps as possible between the AFDRs and OFDRs.

Population Ageing, Financial Deepening and Economic Growth: Evidence from China

“…To test the robustness of the results, in Table 2, neither of the columns (1) and (3) includes other control variables but the annual dummy variables, while both of the columns (2) and (4) include all the control variables. For population ageing, both coefficients on the indicator ln(COA) in columns (1) and (2) as well as both coefficients on the indicator ln(OAD) in columns (3) and (4) are significantly positive at the 1% confidence level. It suggests that since entering an ageing society in 2000, population ageing has boosted China's economic growth.…”

“…With rapid economic growth that even surpassed most developed countries and increasing international influence over the past two decades in China, the factors that affect China's economic growth have attracted much attention. Population ageing and financial deepening are two important factors affecting economic growth in developed countries [1,2]. Evidence from developed countries showed that the process of population ageing and financial deepening reform took place in different periods.…”

Dynamic CGE Model of the Chinese Economy for Fiscal and Financial Policy Analysis

“…Studies of addition Hansen (2014), Fama (2014), Shiller (2014), and Weale (2014) provide theoretical insights in the development of Chinese economy. On the empirical aspect Bhattarai (2015) explains the dynamic CGE model of China for analysis of financial deepening issues. Zhou (2014), Luo and Ying (2014), Zhu, Whalley, and Zhao (2014), Fu, Abrokwa, and Bhattarai (2014), Hsua, Tian, and Xua (2014), Liu and Hsu (2014) review issues relating to the role of public and private sectors in the Chinese economy.…”

Non-Linear Relationship between Financial Development, Economic Growth and Growth Volatility: Evidence from Nigeria

“…It confirms financial deepening as the candidate for the threshold effect in the finance-growth relationship. Excess financial depth has severally been reported as the source of reversal in growth after a given threshold value inCole (1974);Darrat (1999);Rousseau and Wachtel (2011);Cecchetti and Kharroubi (2012); andBhattarai (2015).…”