Volume 13, Number 1, June 2018
| Financial Development and Economic Growth in South Korea: A Cointegrating Regression Approach |
Abstract
In this study, we examine the relationship between financial development and economic growth for South Korea during 1960–2009. We find that GDP, financial development, capital, population, trade, and urbanization are cointegrated. Subsequently, three fully efficient cointegrating regression methods, fully modified OLS (Phillips & Hansen, 1990), canonical cointegrating regression (Park, 1992), and dynamic OLS (Saikkonen, 1992, Stock & Watson, 1993) are adopted. We find that financial development and capital have a statistically significant and positive impact on income. There is a unidirectional Granger causality relationship from real GDP to financial development. Our empirical results provide evidence in favor of the “growth-led finance hypothesis” view for South Korea. Major implications are that economic growth promotes financial development in South Korea and that policies aimed at enhancing economic growth can help to spur the development of the financial sector.
Keywords: Financial development, Economic growth, Cointegrating regression
JEL Classification: G10, O11, O16