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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