Economic growth and market-based financial systems: a review

Abstract

Purpose

This paper aims to survey the existing literature on the causal relationship between market-based financial development and economic growth – in both developed and developing countries, highlighting the theoretical and the empirical evidence.

Design/methodology/approach

The paper divides financial development into bank-based and market-based financial development, and it closely reviews the international literature on the relationship between market-based financial development and economic growth.

Findings

The direction of causality between market-based financial development and economic growth varies from one country to another, depending on various country-specific characteristics, data sets and the methodology used by the researcher. On balance, there is predominant support for the supply-leading response, where the development of the market-based financial sector is expected to precede the development of the real sector.

Originality/value

This review differs fundamentally from previous reviews, in that it divides financial development into bank-based and market-based financial development, and it focuses closely on market-based financial development and economic growth. The majority of the previous studies on this subject failed to make such a distinction, thereby focusing mainly on the general causal relationship between the overall financial development and economic growth. To the best of the authors' knowledge, this may be the first review of its kind to survey the existing research in detail on the causal relationship between market-based financial development and economic growth, in both developed and developing countries.

Citation

Nyasha, S. and Odhiambo, N.M. (2015), "Economic growth and market-based financial systems: a review", Studies in Economics and Finance, Vol. 32 No. 2, pp. 235-255. https://doi.org/10.1108/SEF-03-2014-0053