Does economic growth influence financial development. Case study on Russian economic growth and financial development.

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School of Economics | Master's thesis
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Date
2009
Major/Subject
Finance
Rahoitus
Mcode
Degree programme
Language
en
Pages
92
Series
Abstract
PURPOSE OF THE STUDY The objective of the thesis is to evaluate connection between economic growth and financial development. Especially, identify if there is causal relationship between economic growth and financial development. Previous studies are still in disagreement of causal relationship. Therefore, the thesis tries to clarify this connection. The study concentrates its efforts on developing markets, particularly on Russian economic growth and its effect on financial development. Previously, the growth-finance relationship concerning the Russian market has been omitted, hence, the thesis is trying to fulfill this gap. The study uses cointegration and Granger causality tests, as well as case-study analysis to evaluate the link and causality between economic growth and financial development. DATA The data in the thesis is obtained from variety of different sources. Empirical part of the study utilized data from International Financial Statistics reports published by the International Monetary Fund. The data measures economic growth, financial development, and capital markets in Russia and other countries for the period of 1995 - 2008. The case study part employed diverse sources of data such as the Russian Federal State Statistic Service, International Monetary Fund database, The Central Bank of Russian Federation, BankScope and others. RESULTS The empirical results of the study indicate there might be bi-directional causality between economic growth and financial development. Moreover, the empirical study did not find any effect of country’s economic development on the growth-finance relationship. Additionally, the outcomes indicate the growth-finance relationship being country specific. In terms of Russia, the results demonstrate there is demand-leading relationship between economic growth and financial efficiency, at the same time a bidirectional causal relationship between economic growth and equity markets.
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Keywords
economic growth, financial development, supply-lead hypothesis, demand-lead hypothesis, bidirectional, causality, cointegration, granger causality
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