Speaker: Professor Wong, Wing Keung (Asia University, Taiwan)
Date: 3 June 2019 (Mon)
Time: 15:30 – 17:30
Venue: RLB 303, Research Complex
Do both demand-following and supply-leading theories hold true in developing countries? In this seminar, the speaker recommends using both multivariate linear and nonlinear causality tests to analyze the relationship between financial development and economic growth. In particular, multivariate nonlinear causality test allows us to consider dependent and joint effects among financial variables, and detect a multivariate nonlinear deterministic process. By the end of the seminar, the recent applications of multivariate nonlinear co-integration and causality tests will be discussed.
- First to use cointegration and (non)linear causality to study financial development and economic growth.
- Financial development and economic growth are moving together in some developing countries.
- Both demand-following and supply-leading theories hold for all of the countries studied in our paper.
- Including nonlinear test allow us to detect causality in five more countries.
- Our finding helps in the decision making in the development of the countries and reducing poverty.
To overcome the limitations of the traditional approach which uses linear causality to examine whether the supply-leading and demand-following theories hold. As certain countries will be found not to follow the theory by using the traditional approach, this paper first suggests using all the proxies of financial development and economic growth as well as both multivariate and bivariate linear and nonlinear causality tests to analyze the relationship between financial development and economic growth. The multivariate nonlinear test not only takes into consideration both dependent and joint effects among variables, but is also able to detect a multivariate nonlinear deterministic process that cannot be detected by using any linear causality test. We find five more countries in which the supply-leading hypothesis and/or demand-following hypothesis hold true than with the traditional approach. However, there is still one country, Pakistan, for which no linear or nonlinear causality is found between its financial development and economic growth.
To overcome this limitation, this paper suggests nonlinear cointegration in the analysis. This leads us to conclude that either supply-leading or demand-following hypotheses or both hold for all countries without any exception. There will be some types of relationships between economic growth and financial development in any country such that either they move together or economic growth causes financial development or financial development causes economic growth without any exception. The finding in our paper is may be useful for governments, politicians, and other international institutions in their decision making process for the development of the countries and reducing poverty.