Journal of Economics and Financial Analysis, 4 (1), pp. 55-77, [2020]

Finance-Growth Nexus and Globalization in Brazil, India, Philippines, Thailand, and Turkey: Evidence from VECM Cointegration Analysis



We investigate the causal relationship between financial development and economic growth―the finance-growth nexus―in Brazil, India, Philippines, Thailand, and Turkey by controlling for the globalization indicators of trade openness, foreign direct investment (FDI), and portfolio investment, together with the structural break dummy. Our sample countries of different regions have various experiences of developing and liberalizing their financial systems and external sectors as well as financial crises. Time series data span over the period 1974-2017, and two financial indicators of size and efficiency are used in estimation. Implementing the cointegration and Granger causality tests in the framework of the vector error correction model (VECM), we find that: 1) financial size and economic growth are in a positive, bilateral relationship in all the sample countries, although that of Turkey is more inclining toward economic growth causing financial size; 2) when financial development is proxied by financial efficiency, the results are different among the five countries; and 3) although theoretically expected to be contributive, the globalization indicators of trade openness, FDI, and portfolio investment exhibit either a positive or negative impact on financial development and economic growth. Based on empirical findings, we argue that policy-makers should design and develop financial sector polices and growth strategies fully considering the nature of their countries’ own institutional and structural characteristics.


Economic Growth; Financial Development; Globalization; VECM; Cointegration; Granger Causality.

JEL Classification

E44, F43, F62, O53, O54.

Full Text:


Ari, A., & Cergibozan, R. (2016). The twin crises: determinants of banking and currency crises in the Turkish economy. Emerging Markets Finance and Trade, 52(1), pp. 123–135.

Beck, T., Demirguc-Kunt, A., & Levine, R. (2009). Financial institutions and markets across countries and over time: data and analysis. World Bank Policy Research Working Paper, no.4943. Washington DC: World Bank.

Cevik, S., & Rahmati, M.H. (2018). Searching for the finance-growth nexus in Libya. Empirical Economics, First Online: 31 December.

Cheung, Y., & Lai, K. (1993). Finite-sample sizes of Johansen’s likelihood ratio tests for cointegration. Oxford Bulletin of Economics and Statistics, 55(3), pp. 313-28.

Chinn, M.D., & Ito, H. (2008). A new measure of financial openness. Journal of Comparative Policy Analysis, 10(3), pp. 309-322.

Demetriades, P.O., & Hussein, K.A. (1996). Does financial development cause economic growth?: time-series evidence from 16 Countries. Journal of Development Economics, 51(2), pp. 387-411.

De Vita, G., & Kyaw, K.S. (2009). Growth effects of FDI and portfolio investment flows to developing countries: a disaggregated analysis by income levels. Applied Economics Letters, 16(3), pp. 277-283.

Durham, J.B. (2004). Absorptive capacity and the effects of foreign direct investment and equity foreign portfolio investment on economic growth. European Economic Review, 48(2), pp. 285–306.

Elliott, G., Rothenberg, T.J. & Stock, J.H. (1996). Efficient test for an autoregressive unit root. Econometrica, 64(4), pp. 813-836.

Fukuda, T. (2019). Mexico’s finance-growth nexus with trade openness, FDI and portfolio investment: evidence from VECM cointegration analysis. Ecos de Economia, 23(49), pp. 29-44.

Johansen, S. (1988). Statistical analysis of cointegration vectors. Journal of Economic Dynamics and Control, 12(2-3), pp. 231-254.

Johansen, S., & Juselius, K. (1992). Some structural hypotheses in a multivariate cointegration analysis of purchasing power parity and uncovered interest parity for the UK. Journal of Econometrics, 53(1-3), pp. 211–244.

Johansen, S., Mosconi, R., & Nielsen, B. (2000). Cointegration analysis in the presence of structural breaks in the deterministic trend. Econometrics Journal, 3(2), pp. 216–249.

King, R.G., & Levine, R. (1993). Finance and growth: Schumpeter might be right. Quarterly Journal of Economics,108(3), pp. 717-737.

Lane, P.R., & G.M. Milesi-Ferretti. (2007). The external wealth of nations mark II: revised and extended estimates of foreign assets and liabilities, 1970–2004. Journal of International Economics, 73(2), pp. 223–250.

Lee, J., & Strazicich, M.S. (2003). Minimum LM unit root test with two structural breaks. Review of Economics and Statistics, 85(4), pp. 1082-1089.

Lee, J., & Strazicich, M.S. (2004). Minimum LM unit root test with one structural break. Appalachian State University Working Paper. Boone: Appalachian State University.

Levine, R. (1997). Financial development and economicgrowth: views and agenda. Journal of Economic Literature, 35(2), pp. 688-726.

Levine, R., & Zervos, S. (1998). Stock markets, banks and economic growth. American Economic Review 88(3), pp. 537–558.

Lucas, R.E. (1988). On the mechanics of economic development. Journal of Monetary Economics, 22(1), pp. 3-42.

Luintel, K.B., & Khan, M. (1999). A quantitative reassessment of the finance-growth nexus: evidence from a multivariate VAR. Journal of Development Economics, 60(2), pp. 381-405.

McKinnon, R.I. (1973). Money and Capital in Economic Development. Washington DC: Brookings Institution.

Minsky, H.P. (1984). Central banking and money market changes: A reprise. Working Paper No. 72. Seattle: Washington University, Department of Economics.

Nunnenkamp, P., & Spatz, J. (2004). FDI and economic growth in developing economies: how relevant are host-economy and industry characteristics. Transnational Corporations, 13(3), pp. 52-86.

Patra, S., & Dastidar, S.G. (2018). Finance and growth: Evidence from South Asia. Jindal Journal of Business Research, 7(1),pp. 37–60.

Patrick, H.T. (1969). Financial development and economic growth in underdeveloped countries. Economic Development and Cultural Change, 14(2), pp. 174-189.

Phillips, P.C.B., & Perron, P. (1988). Testing for a unit root in time series regression. Biometrika, 75(2), pp. 335–346.

Robinson, J. (1952). The Rate of Interest and Other Essays. London: Macmillan.

Shaw, E.S. (1973). Financial Deepening in Economic Development. London: Oxford University Press.

Tobin, J. (1984). On the efficiency of the financial system. Lloyds Bank Review,153, pp. 1-15.

Toda, H.Y., & Phillips, P.C.B. (1993). Vector autoregression and causality. Econometrica, 61(6), pp. 1367–1393.

Yanikkaya, H. (2003). Trade openness and economic growth: a cross-country empirical investigation. Journal of Development Economics, 72(1), pp. 57– 89.

Wachtel, P. (2011). The evolution of the finance growth nexus. Comparative Economic Studies, 53(3), pp. 475–488.

Creative Commons License
This work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License.