Research On Transmission Mechanism Between Financial Development And Economic Growth In County Area

County area is a linkage between rural and urban areas, a key to their coordinated development and a base on which China is developing further. Now, county area represents close to half of national GDP. However, there are numerous bottlenecks constraining the further growth of this area, of which finance is an important one. At the end of year 2007, loans extended in county area accounted for 23.4% of the national total and deposits about 20.6%. There is a mismatch between the economic and financial developments in county area and this mismatch is increasingly prominent. The relationship between financial and economic developments has attracted widespread attention from both academic and industrial circles. The thesis discusses theoretically and empirically the trend of financial development in county area, the dynamics and interactions between its financial and economic developments and the transmission mechanism by employing the disciplines of finance, regional economics, development economics, institutional economics and econometrics.Firstly, the thesis starts with financial convergence and describes and analyzes the financial status of county area on a nation-wide basis by adopting"finance interrelations ratio"(FIR) as the indicator. The results indicate that on a national basis, financial development demonstrates the trait ofβconvergence, i.e. the potential growth rate of relatively under-developed area in finance is higher than that of more developed area. This characteristic of convergence makes it possible for the government to promote coordinated development of financial and economic developments by taking regional adjustment measures. Further regional empirical study also shows characteristics of club convergence, with the pace of convergence fastest in western regions, followed in turn by the eastern and middle parts of China. This provides us with an empirical base for later research on different regions.Secondly, the thesis discusses the dynamics and interactions between financial development and economic growth in county area. Though there are many studies on such relationship, most existing models cannot address properly the issue of variables omission and endogenous growth. The thesis attempts to address the issue by firstly introducing the Two Sector Production Model, which helps to theoretically identify the relationship between financial development and economic growth in county area. Based on this, the thesis proceeds to determine whether such relationship is a demand-driven type (with economic growth driving financial development) or a supply-driven type (with financial development driving economic growth). On the regional front, the methodology of Granger Causality Test is adopted to discuss the differences of such relationship in eastern, middle and western areas with the characteristics of convergence in these three areas. This also provides some policy reference for the solution to the mismatch between financial development and economic growth in county area.Thirdly, the thesis discusses the affecting mechanism of financial development on the economic growth in county area. Previous study shows that, on a nation-wide basis, the development of finance lags behind the economy in county area. The relationship between the two falls into the demand-driven category, which is contrary to the conclusion made by Hugh Patrick in his study of financial development in developing countries. The conclusion is further supported by Granger Causality Test. The next task is to describe the affecting mechanism of financial development on economic growth in county area. The thesis tries to address this issue from two aspects. First, it identifies the financial factors affecting economic growth in county area. Due to lack of statistics, existing studies generally employ the theory of endogenous growth and attribute the issue of county area economy to financial inputs and institutional factors, which barely have any practical significance. The thesis applies the methodology of Data Envelopment Analysis (DEA) to identify the major financial factors having effects on the growth frontier of county area economy. The thesis puts forward the idea that apart from loan balance and quality, financial density also affects how efficiently financial development contributes to economy. Hence improving financial density is a practical guidance for policy-making. Second, the author analyzes the relationship between financial density and economic growth. Further analysis is required on financial density since this concept was put forward for the first time in related studies. The result is that there is an inverted U-shaped relationship between financial development and economic growth in county area. An optimized density is drawn from the empirical model, which provides certain reference for appropriate financial outlet distribution. Fourthly, the thesis examines the counter effects of economic growth on financial development in county area. Such effects are multifaceted and on different levels, and financial development doesn't necessarily follow the pace of economic growth. In an attempt to gain some insight of economy's feedback to financial development in county area, the author conducts analysis on the micro level. Employing the statistics from Agricultural Bank of China and the methods of Principal Component Analysis and Regression Analysis, the thesis arrives at the conclusion that economic structure, the degree of financial clustering, institutional factors and ecological factors are also important for financial development. Therefore, the research on the counter effects echoes the study on the dynamics and interactions between financial development and economic growth.Finally, on the basis of theoretical and empirical studies, the thesis draws on the theory of institutional evolution to further explain the above results. The institutional reform of China's financial sector in recent years took the path of compulsory institutional evolution, which has been dominated by the government and fits well with the demand-driven characteristic of financial development in county area. Demand has been proactively created to realize coordinated development between county area finance and economy, complementing market forces by the visible hand of the government. Based on the above theoretical analysis and results, and with the current county area economic and financial institutional arrangements in mind, the author makes some policy recommendations, including: reforming and upgrading county area institutional arrangements in line with coordinated development of urban and rural areas, emphasizing and encouraging interest-induced evolution of county area financial institutions, reinforcing coordination to achieve virtual interaction between county area economy and the evolution of financial institutions.