(A thesis submitted in partial fulfilment of the requirements for the degree of MASTER OF ARTS IN DEVELOPMENT ECONOMICS, VIETNAM – THE NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS)
By Le Thi Hoang Oanh (VNP 19)
Academic Supervisor: Dr. Pham Thi Bich Ngoc
This paper focuses on the impacts of financial development on economic growth in 122 low and middle-income countries from 1995 to 2014. Indicators for financial development include the ratio of liquid liabilities to GDP and the ratio of domestic credit to private sector by banks to GDP. Control variables include the inflation rate, the ratio of government expenditures to GDP, the ratio of exports and imports to GDP and the secondary education enrollment rate. Research results are drawn from estimation methods of FEM and GMM.
In particular, the ratio of domestic credit to private sector by banks to GDP has negative impacts on economic growth rate, which is concluded by both FEM and GMM. However, the impacts of the ratio of liquid liabilities to GDP on economic growth rate are differently described by the two estimation methods. According to the FEM, the ratio of liquid liabilities is statistically significant and has negative influences on economic growth rate. However, according to the GMM, the ratio of liquid liabilities to GDP is statistically insignificant and has no effects on the economic growth rate. Although the estimation results by FEM and GMM have some variations, the final conclusions are considered to be identical: Financial development is proposed to have negative impacts on economic growth of countries with low and middle incomes. The explanations for the negative impacts can be drawn from the fact that capital investments tend to have low productivity and weak efficiency in countries with low and middle incomes.
Keywords: Financial development, liquid liabilities, domestic credit, economic growth.
Abbreviations: FDI - Foreign Direct Investment; FEM - Fixed Effects Model; FPI - Foreign Portfolio Investment; GDP - Gross Domestic Product; GMM - Generalized Method of Moments; GNI - Gross National Income; IMF - International Monetary Fund; IV - Instrumental Variable; ODA - Official Development Assistance; OLS - Ordinary Least Squares; REM - Random Effects Model; OECD - Organization for Economic Cooperation and Development.
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