Financial development and economic growth in South Korea: an application of smooth transition error correction analysis

Abstract

This article investigates the influences of financial development on economic growth for South Korea. The analysis is performed using an error correction model and a nonlinear smooth transition error correction technique. Empirical results from the cointegration test reveal that there is a long-run equilibrium relationship among financial development and economic growth. We also demonstrate that the nonlinear specification is more appropriate than the linear model and confirm the presence of nonlinearity in the aggregate output. Furthermore, we find that the short-run effect of financial development on economic growth is unstable despite the positive long-term effect.

Asymmetric cointegration and causality effects between financial development and economic growth in South Africa

“…In other words, this result implies that the asymmetric relationship between financial development and economic growth can be affected by both financial and economic development factors. Another study worth taking note of is that presented by Chiou-Wei et al (2010), who opt to use a smooth SEF 32,4 transition error-correction model (STECM) framework to investigate the relationship between financial development and economic growth for South Korean data. The obtained empirical results reveal a positive long-run relationship between financial development and economic growth for the data.…”

“…As a by-product, the approach adopted in our study presents a deviation from the norm of previous studies conducted for the South African economy, which rests on the assumption of a linear relationship existing between financial development and economic growth (Odhiambo, 2004;Gondo, 2009;Acaravci et al, 2009 andSunde, 2012 for illustrative examples). As conveniently argued by Chiou-Wei et al (2010), such an assumption of linear cointegration may be restrictive in capturing multiple equilibriums induced by reciprocal externalities between the financial and real sectors.…”

“…On the other hand, a considerable number of studies oppose this contention by arguing that the restrictions imposed by government on the financial sector could cause problems in the development of the financial sector and as a consequence, this inhibits growth in the real sector (Lucas (1998), Fry (1978, 1980; Galbis (1977); Boyreau-Debray (2003) and Akinlo (2004)). As a means of reconciling the aforementioned opposing views regarding the relationship between financial development and economic growth, a new wave of studies in the empirical paradigm have recently put into question the validity of a linear relationship between financial development and economic growth (Diedda and Fattouh (2002); Khan and Senhadji (2003); Lee and Wong (2001); Chiou-Wei et. al.…”