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Girma, Abebe Gule: The Role of Financial Development in Post-War Economic Growth

                    These studies suggest that the effect of financial development on economic growth
                    depends on human capital, the efficiency of corporate investments and the financial
                    markets,  and  the  effectiveness  of  regulatory  environment.  Different  from  these
                    studies,  we  focus  on  the  war-torn  societies  and  examine  the  effect  of  financial
                    devleopment on economic growth, specifically during the post-war period. Aghion et
                    al.  (2004)  show  that  temporary  macroeconomic  shocks  have  large  and  persistent
                    effects. Thus countries that are going through a phase of financial development and
                    experiencing warfare may become more unstable in the short run and financial shocks
                    may lead to negative economic growth. Aghion et al. (2005) show that when country
                    falls behind  technologically and suffers from a loss of human capital,  it becomes
                    increasingly difficult to absorb new global technology and innovate faster which is
                    the key to convergence to global living standards. The lower the level of financial
                    devleopment  in  the  country,  the  greater  will  be  this  disadvantage.  Our  paper
                    investigates this effect and examines the role of financial development for post-war
                    economic growth.

                    RESEARCH METHODOLOGY
                    We  use  macroeconomic  panel  data  on  eight  select  countries  with  lengthy  war
                    experience from 1970-2007. The sample countries selected based on data availability
                    such that we require at least 10 years of data after the war to see the immediate effects
                    of financial sector development on the economic growth of a post-war society. We
                    also compare the effect of financial development on economic growth after the war
                    period,  to  the  same  effect  during  the  pre-war  and  during  the  war  periods.  Our
                    dependent variable is the proxy variable used for the dependent variable is the real
                    GDP  per  capita  annual  growth  rate.  Following  previous  studies  (Abdul  Rahman,
                    Muhammad Arshad Khan, and Lanouar Charfeddine, 2020) (Bist, 2018) (Dimitrios
                    Asteriou and Konstantinos Spanos, 2019) (Biplab Kumar Guru, Inder Sekhar Yadav,,
                    2019), we use domestic credit provided to private sector (scaled by GDP) as the key
                    explanatory variable and our proxy for financial development. We include official
                    exchange rate, money supply annual growth, and lending interest rate to control for
                    the  effect  of  monetary  and  fiscal  policy.  Also,  we  control  general  national
                    expenditures,  central  government  debt,  domestic  saving,  trade  openness,  foreign
                    direct investment, and foreign aid to isolate the effect of financial development. We
                    retrieved the data for all the variables used in this study from the World Bank database.

                    Taking to consider from the theoretical linkages between financial development and
                    economic growth relationship advocated, our theoretical models presented. First, in
                    line with our analytical framework, this study proposes a theoretical model where real
                    GDP  per  capita  is  driven  primarily  by  financial  development  and  sets  of  control
                    variables during postwar/war and prewar periods.


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