Stock Market Essay

5660 Words Dec 6th, 2012 23 Pages
Review of Development Economics, 9(2), 166–176, 2005

Endogenous Growth Models and Stock Market Development: Evidence from Four Countries
Guglielmo Maria Caporale, Peter Howells, and Alaa M. Soliman*

Abstract
This paper re-examines the relationship between stock market development and economic growth. It provides a theoretical basis for establishing the channel through which stock markets affect economic growth in the long run. It examines the hypothesis of endogenous growth models that financial development causes higher growth through its influence on the level of investment and its productivity. The empirical part of this study exploits techniques recently developed to test for causality in VARs. The evidence obtained from a sample
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Due to the advances in the endogenous growth literature, recent models have been trying to identify the mechanism through which financial markets influence economic growth. Various channels have been suggested. First, financial markets can affect economic growth through efficient resource allocation. King and Levine (1993) proposed a model in which innovation activities serve as the engine of growth. A higher rate of successful innovations results in a higher growth rate of productivity. In the absence of financial markets, one might invest in projects that can be promptly liquidated, instead of investing in assets that are more productive, but financially illiquid. Markets can provide individuals with less risky and liquid productive investments (Levine, 1993). Second, financial markets can influence economic growth through the information
* Caporale: London South Bank University and London Metropolitan University, 103 Borough Road, London SE1 0AA, UK. Tel: +44(0)2078157012; Fax: +44(0)2078158226; E-mail: g.m.caporale@lsbu.ac.uk. Howells: HLSS, University of the West of England, Coldharbour Lane, Bristol, BS16 1QY, UK. Tel: +44(0)1173283684; E-mail: peter.howells@uwe.ac.uk. Soliman: Leeds Metropolitan University, Leeds 6 3QS, UK. Tel: +44(0)1132837452; E-mail: a.soliman@leedsmet.ac.uk.

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