Financial development, economic growth, and income inequality: a Toda-Yamamoto panel causality test

Authors

  • Theodora Sotiropoulou PhD candidate, Department of Business Administration, University of Patras, Greece
  • Stefanos Giakoumatos Professor, Department of Accounting and Finance, University of Peloponnese, Greece
  • Antonios Georgopoulos Professor, Department of Business Administration, University of Patras, Greece

DOI:

https://doi.org/10.17811/ebl.12.2.2023.172-185

Keywords:

economic growth, financial development, inequality, panel causality test

Abstract

This paper examines the causality between financial development, economic growth, and income inequality using panel data for 23 European Union countries over the period 1987-2017. The empirical study employs a trivariate setting of Granger non-causality test of heterogeneous panels adopting the Toda and Yamamoto approach using several proxies of financial development capturing different dimensions of the banking system and stock markets. The findings suggest mixed evidence for the causality direction between financial development and economic growth and financial development and income inequality. In addition, the results support bidirectional causality between economic growth and inequality and one-way causality from inequality to growth. The policymakers can focus primarily on economic growth to raise the demand for financial services and encourage income distribution.

References

Abu‐Bader, S., & Abu‐Qarn, A. S. (2008). Financial development and economic growth: empirical evidence from six MENA countries. Review of Development Economics, 12(4), 803-817.

Al-Yousif, Y. K. (2002). Financial development and economic growth: another look at the evidence from developing countries. Review of financial economics, 11(2), 131-150.

Amri, K. (2018). Is there causality relationship between economic growth and income inequality?: Panel data evidence from Indonesia. Eurasian Journal of Economics and Finance, 6(2), 8-20.

Andriansyah, A., & Messinis, G. (2019). Stock prices, exchange rates and portfolio equity flows: A Toda-Yamamoto panel causality test. Journal of Economic Studies.

Apergis, N., Filippidis, I., & Economidou, C. (2007). Financial deepening and economic growth linkages: a panel data analysis. Review of World Economics, 143(1), 179-198.

Assane, D., & Grammy, A. (2003). An assessment of the growth and inequality causality relationship. Applied Economics Letters, 10(14), 871-873.

Bist, J. P. (2018). Financial development and economic growth: Evidence from a panel of 16 African and non-African low-income countries. Cogent Economics & Finance, 6(1), 1449780.

Breusch, T. S., & Pagan, A. R. (1980). The Lagrange multiplier test and its applications to model specification in econometrics. The review of economic studies, 47(1), 239-253.

Calderón, C., & Liu, L. (2003). The direction of causality between financial development and economic growth. Journal of development economics, 72(1), 321-334.

Cavenaile, L., Gengenbach, C., & Palm, F. (2014). Stock markets, banks and long run economic growth: A panel cointegration-based analysis. De Economist, 162(1), 19-40.

Christopoulos, D. K., & Tsionas, E. G. (2004). Financial development and economic growth: evidence from panel unit root and cointegration tests. Journal of development Economics, 73(1), 55-74.

Demetriades, P. O., & Hussein, K. A. (1996). Does financial development cause economic growth? Time-series evidence from 16 countries. Journal of development Economics, 51(2), 387-411.

Demirgüç-Kunt, A., & Levine, R. (2009). Finance and inequality: Theory and evidence. Annu. Rev. Financ. Econ., 1(1), 287-318.

Dumitrescu, E. I., & Hurlin, C. (2012). Testing for Granger non-causality in heterogeneous panels. Economic modelling, 29(4), 1450-1460.

Galor, O., & Zeira, J. (1993). Income distribution and macroeconomics. The review of economic studies, 60(1), 35-52.

Gimet, C., & Lagoarde-Segot, T. (2011). A closer look at financial development and income distribution. Journal of Banking & Finance, 35(7), 1698-1713.

Hsueh, S. J., Hu, Y. H., & Tu, C. H. (2013). Economic growth and financial development in Asian countries: A bootstrap panel Granger causality analysis. Economic Modelling, 32, 294-301.

Jihène, S., & Ghazi, B. (2013). The causality between income inequality and economic growth: empirical evidence from the Middle East and North Africa region. Asian Economic and Financial Review, 3(5), 668.

Kar, M., Nazlıoğlu, Ş., & Ağır, H. (2011). Financial development and economic growth nexus in the MENA countries: Bootstrap panel granger causality analysis. Economic modelling, 28(1-2), 685-693.

King, R. G., & Levine, R. (1993). Finance and growth: Schumpeter might be right. The quarterly journal of economics, 108(3), 717-737.

Levine, R. (2005). Finance and growth: theory and evidence. Handbook of economic growth, 1, 865-934.

Lucas Jr, R. E. (1988). On the mechanics of economic development. Journal of monetary economics, 22(1), 3-42.

Pesaran, M. H. (2004). General Diagonist Tests for Cross Section Dependence in Panels. June 2004. Mimeo, University of Cambridge.

Pesaran, M. H. (2007). A simple panel unit root test in the presence of cross‐section dependence. Journal of applied econometrics, 22(2), 265-312.

Pesaran, M. H., Ullah, A., & Yamagata, T. (2008). A bias‐adjusted LM test of error cross‐section independence. The Econometrics Journal, 11(1), 105-127.

Pradhan, R. P., Mukhopadhyay, B., Gunashekar, A., Samadhan, B., & Pandey, S. (2013). Financial development, social development, and economic growth: The causal nexus in Asia. Decision, 40(1), 69-83.

Rioja, F., & Valev, N. (2004). Does one size fit all?: a reexamination of the finance and growth relationship. Journal of Development economics, 74(2), 429-447.

Risso, W. A., Punzo, L. F., & Carrera, E. J. S. (2013). Economic growth and income distribution in Mexico: A cointegration exercise. Economic Modelling, 35, 708-714.

Risso, W. A., & Carrera, E. J. S. (2012). Inequality and economic growth in China. Journal of Chinese Economic and Foreign Trade Studies.

Robinson, J. (1952). The model of an expanding economy. The Economic Journal, 62(245), 42-53.

Schumpeter, J. A. (1912). 1934. The theory of economic development.

Sehrawat, M., & Giri, A. K. (2016). Financial development, poverty and rural-urban income inequality: evidence from South Asian countries. Quality & Quantity, 50(2), 577-590.

Shan, J. Z., Morris, A. G., & Sun, F. (2001). Financial development and economic growth: An egg‐and‐chicken problem?. Review of international Economics, 9(3), 443-454.

Solt, Frederick, 2019, "The Standardized World Income Inequality Database, Versions 8-9"

Stolbov, M. (2017). Causality between credit depth and economic growth: evidence from 24 OECD countries. Empirical Economics, 53(2), 493-524.

Swamy, V., & Dharani, M. (2018). An alternate approach in exploring the causal link between financial development and economic growth—Evidence from advanced economies. International Journal of Finance & Economics, 23(1), 55-76.

Toda, H. Y., & Yamamoto, T. (1995). Statistical inference in vector autoregressions with possibly integrated processes. Journal of econometrics, 66(1-2), 225-250.

Vo, D. H., Nguyen, T. C., & Tran, N. P. (2019). What factors affect income inequality and economic growth in middle-income countries?. Journal of Risk and Financial Management, 12(1), 40.

Westerlund, J. (2007). Testing for error correction in panel data. Oxford Bulletin of Economics and statistics, 69(6), 709-748.

Zang, H., & Kim, Y. C. (2007). Does financial development precede growth? Robinson and Lucas might be right. Applied Economics Letters, 14(1), 15-19.

Downloads

Published

13-07-2023

How to Cite

Sotiropoulou, T., Giakoumatos, S., & Georgopoulos, A. (2023). Financial development, economic growth, and income inequality: a Toda-Yamamoto panel causality test. Economics and Business Letters, 12(2), 172–185. https://doi.org/10.17811/ebl.12.2.2023.172-185

Issue

Vol. 12 No. 2 (2023): June

Section

Articles

License

The works published in this journal are subject to the following terms:

1. Oviedo University Press (the publisher) retains the property rights (copyright) of published works, and encourages and enables the reuse of the same under the license specified in paragraph 2.

© Ediuno. Ediciones de la Universidad de Oviedo / Oviedo University Press

2. The works are published in the online edition of the journal under a Creative Commons Attribution-Non Commercial-Non Derives 3.0 Spain (legal text). You can copy, use, distribute, transmit and publicly display, provided that: i) you cite the author and the original source of publication (journal, publisher and URL of the work), ii) they are not used for commercial purposes, iii) mentions the existence and specifications of this license.

3. Conditions of self-archiving. The author can archive the post-print version of the article (publisher’s version) on the author’s personal website and/or on the web of  the institution where he belong, including a link to the page of the journal and putting the way of citation of the work. Economics and Business Letters and its URL https://reunido.uniovi.es/index.php/EBL/index are the only authorized source for correctly giving the reference of the publisher’s version in every mention of the article.