The Finance-Growth Nexus in the High Performance Asian Economies: A Bootstrap Panel Causality Analysis

Abstract

This study examines the causal link between financial development andeconomic growth in the High Performance Asian Economies (HPAEs). The newly developed panelcausality testing approach of Emirmahmutoglu and Kose (2011) which controls for both crosssectional dependency and heterogeneity across countries is applied to the 7 HPAEs for the period1989-2017. In order to capture the relationship between real sector development and both creditand stock market development, two different indicators are used. The panel findings indicate thatwhile there is two-way causal relationship between stock market development and economicgrowth, the causality exist only one-way from growth to credit market development. This impliesthat the demand-following hypothesis is supported in the panel of HPAEs. Moreover, the resultsshow that the existence and direction of causality vary among the different HPAEs. These variousevidences lead to country specific policy implications and recommendations.