Page 16 - Azerbaijan State University of Economics
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THE JOURNAL OF ECONOMIC SCIENCES: THEORY AND PRACTICE, V.80, # 2, 2023, pp. 14-27
LITERATURE REVIEW
According to the economic theory, resilient and effective financial systems such as
banks, stock markets, and bond markets, which channel financial resources for
productive purposes, contribute to promoting economic growth. The link between
financial development and economic growth has received renewed attention from
researchers since the 1990s. However, the first finance nexus economic growth
relationship theory was developed by Joseph Schumpeter in 1911. According to his
theory, well-developed financial systems would promote savings for productive
purposes, efficiently allocate resources, strengthen risk management, and reduce
information irregularities, encouraging innovation and entrepreneurship to promote
national economic growth. Following Schumpeter's theory, King and Levine (1993)
explored the empirical relationship between financial development and economic
growth and confirmed the result that financial development is robustly and highly
positively associated with growth. Similarly, Gregorio and Guidotti (1995) confirm a
strong positive association between financial development and economic growth in a
large sample of countries. Other studies find similar results in cross-country analyses
for different regions, such as ten European Union countries over the period from 1994-
2007 (Caporale et al. 2014), sixteen low-income countries (Bist 2018), for BRICS
countries (Guru and Yadav 2019), for thirty-two sub-Saharan African countries
(Yusheng et al. 2021), for select countries in Southeast Asia (Ho et al. 2021), for six
Balkan economies (Rehman and Hysa, 2021), and for emerging economies (Sarwar
et al. 2020; Minh et al. 2022).
In contrast, numerous studies also find that the effect of financial development on
economic growth in not always positive and depends on macroeconomic policies. For
example, Gregorio and.Guidotti (1995) argue that the main channel of transmission
from financial development to growth is the efficiency of investment. They show that
the relationship between financial development and economic growth becomes
inverse in select Latin American countries due to poor regulatory environment and
low efficiency of capital allocation. Sarwar et al. (2020) show that this relationship is
positive when financial development also contributes to human capital growth.
Samargandi et al. (2015) conclude that too much finance exerts a negative influence
on growth in middle-income countries for shorter time horizon. Asteriou and Spanos
(2019) examine the relationship between financial development and economic growth
in Europe during the recent global financial crisis. Their findings indicate that
financial development fosters economic growth, before the crisis, while after the crisis
this effect becomes negative. and confirmed the result that in the precrisis period.
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