| This thesis takes both theoretical and empirical approaches to study financial development and economic growth. In the theoretical study, an endogenous growth model is constructed to examine the relationship between financial development and economic growth. In the empirical study, an innovative econometric technique and new financial measures are employed to examine the direction of causality between financial development and economic growth.; The theoretical study constructs an open-economy, two-sector endogenous growth model and conducts both steady-state and dynamic analyses. Four interesting results are obtained. First, the study shows that financial development and economic growth positively and interactively affect each other. In the absence of liquidity constraints the economy moves to its steady state along a stable transitional path. Second, the paper studies the effects of severe liquidity constraints on transitional dynamics and demonstrates a threshold effect in financial development and economic growth. Third, the paper demonstrates that financial repression has detrimental effects on economic growth. Fourth, the paper shows that financial liberalization promotes economic growth.; The empirical study employs the Geweke decomposition test on pooled data of 109 developing and industrial countries from 1960 to 1994 to examine the direction of causality between financial development and economic growth. Unlike traditional approaches that use unidirectional causality tests, the Geweke decomposition test shows that the causal relationships between financial development and economic growth can be measured as the sum of the Granger causality from financial development to economic growth, the Granger causality from economic growth to financial development, and the instantaneous causality between them.; There are four main findings from the empirical study. First, financial development generally leads to economic growth. Second, the Granger causality from financial development to economic growth and the Granger causality from economic growth to financial development coexist in 87 of the developing countries and 22 of the industrial countries. Third, financial deepening contributes more to the causal relationships in the developing countries than in the industrial countries. Fourth, the longer the sampling interval, the larger the effect of financial development on economic growth. |
