Capital Market Development&Economic Growth

This paper examines the relationship between capital market development andeconomic growth for a panel data set of50countries over1980-2009, with a specialemphasis on bond and derivative market development. Variables for the bankingsector and the stock, bond and derivative markets are regressed against the real GDPper capita growth rate using ordinary least squares. The sample set is evenly split intohigh income and developing country subgroups to control for the different effects offinance on growth experienced by countries at varying stages of development. Lead-lag regressions and Granger causality tests are also used in order to determine thedirection of causality between finance and growth.Overall, the paper finds a significant and positive relationship betweendomestic bond market size and economic growth for the developing countries in thestudy, and a significant and negative relationship for the developed countries.Furthermore, the direction of causality seems to run from bond market developmentto economic growth. The results show a positive and significant relationship betweenderivative trading volume and growth for all countries in the study. However, thedirection of causality seems to run from growth to derivative market development.The paper also finds that economic growth promotes banking sector developmentrather than the other way around, and that stock market activity is not as significant asthe other financial variables in the finance-growth nexus.