The Effect of Financial Development on Economic Growth and Economic Volatility

Abstract

After the Asian financial crisis in 1997, the academic circles turned their attention to the study of the relationship of financial development, economic growth and economic volatility. As an important development industry, the financial industry has a direct impact on global economic growth and economic stability. This paper analyzes the impact mechanism of financial development on economic growth and volatility from the perspectives of the credit market, capital market and financial derivatives market. Taking the macro data of 50 countries from 1997 to 2014 as samples, introducing GDP, government expenditure, trade openness, CPI and other control variables, using individual and time fixed effects, divide the sample into advanced countries and emerging countries, and verify the statistical relationship between financial development and economic growth and economic volatility from the two dimensions of financial development quantity and financial development quality. Besides, the impact of financial development on economic recession is explored. The results show that whether in advanced or emerging countries, the quantity of financial development has an inhibitory effect on economic growth, while the quality of financial development can promote economic growth. Financial development has less impact on economic volatility but has a greater impact on emerging countries than in advanced countries, which will help explain the economic phenomenon that the volatility of emerging countries is higher than that of advanced countries.