What Is the Connection Between the Stock Market and Economic Growth?

Financial development is the continuous increase of financial efficiency caused by the expansion of financial transaction scale and the heightened financial industry. It is reflected in the elimination of financial repression and the improvement of financial structure, that is, the innovation of financial instruments and the diversification of financial institutions to adapt to economic development. The quantitative aspect (scale) can be measured by indicators such as the ratio of financial assets to physical assets (financial-related ratios), and the qualitative aspect (efficiency) can be the actual interest rate, the classified combination of financial instruments and economic sectors (financial correlation matrix), various The department's fund flow table consolidation (life-finance transaction matrix) and financing cost ratio are used to measure. Financial innovation (including institutional innovation and technological innovation) carried out by economic entities in pursuit of potential benefits is the fundamental driving force for financial development. The general rule of financial development is that financial-related ratios tend to increase. ^[1]

Financial development

1. In the course of a country's economic development, the growth of the financial superstructure is faster than the growth of the economic infrastructure represented by national output and national wealth, so the financial-related ratio (FIR) has an increasing trend.

2. The increase of a country's financial-related ratio is not endless. Once a certain stage of development is reached, especially when the FIR reaches between 1 and 1.5 (which was reached in Western Europe and North America in the early 20th century), the ratio will stabilize.

3. The FIR of less developed countries is much lower than that of European and North American countries. The FIR of less developed countries is mostly between 1 and 2/3, which is equivalent to the United States and

(I) Positive effects of financial development on economic development

1. Financial development is conducive to the accumulation and concentration of capital, it can help achieve modern large-scale production and operation, and realize the benefits of economies of scale.

2. Financial development helps to improve the efficiency of the use of resources and thus the socio-economic efficiency.

3. Financial development helps to increase the proportion of savings made with financial assets, and therefore helps raise the level of investment in society.

(B) the role of economic development in financial development

1. Economic development has continuously raised the income level of society, thereby increasing people's demand for financial investment and wealth management services.

2. Economic development has formed more and more large enterprise groups, and these large enterprise groups require modern financial institutions that match their financing needs to provide services for them.

1. There is no correlation between financial development and economic growth

Regarding the relationship between money and the real economy, western classical economists proposed the theory of currency neutrality and credit media based on Say's law, which believed that changes in the money supply would not affect actual economic variables such as output and employment. Later economists such as K. Wicksell, while recognizing that currency has a significant and substantial impact on economic growth, focused mainly on eliminating the adverse effects of currency on the economy. Friedman, a representative of the currency school, believes that "currency is very important", but in the short term, changes in the money supply in the long term will only cause changes in the price level and will not affect actual output. Joan Robinson also believes that the emergence and development of the financial system is only a passive response to economic growth.

2. There is a certain causality and interaction between financial development and economic growth

In the 1970s, Mckinnon and Shaw took the financial problems of developing countries as research objects, and believed that there were serious financial constraints and financial depression in developing countries. This not only weakens the ability of the financial system to gather financial resources, but also stagnates or even retrogresses the development of the financial system. In 1973, they put forward the famous theory of financial shallowness and financial liberalization. From the two different perspectives of "financial restraint" and "financial deepening", they combined the theory of money and finance with the theory of development to fully demonstrate the dialectical relationship between money and finance and economic development. They believe that the shortage of funds in developing countries is not due to a lack of funds available for accumulation, but because "financial restraint" has caused congestion in financing channels and distortion of capital costs. With the deepening of financial conditions, the problem of insufficient funds for economic construction in developing countries can be alleviated.

Foreign aspect

In the study of the relationship between financial development and economic growth, foreign scholars have always been ahead, and Goldsmith has pioneered empirical research. He used the ratio of the value of financial intermediary assets to GNP as an indicator of a country's financial development. By examining data from 35 countries in 103 years (1860 to 1963), he found that financial development and economic growth generally occur simultaneously. The period of rapid growth is always accompanied by the rapid development of finance. The disadvantage is that he has not been able to indicate what the cause and effect are.

King and Levine's research on Goldsmith is insufficient. Sampling data from 80 countries for 30 years and systematically controlling the factors that affect growth indicate that there is a statistically significant positive correlation between financial development and economic growth. Fast and vice versa. Levine's research has since triggered a climax in finding evidence that financial development affects economic growth.

Levine and Zervos (1996) extended and analyzed the relationship between financial intermediaries and economic growth by introducing some indicators that reflect the development of the stock market in the regression model. The research results show that the development of banks and the liquidity of the stock market not only have a strong positive correlation with the economic growth rate, productivity growth rate, and capital accumulation rate in the same period, but also the economic growth rate, productivity growth rate, and capital. Very good predictor of accumulation rate.

2. Domestic aspect

Domestic theoretical research started late and is relatively inadequate. However, by learning from the existing relevant theoretical research results abroad, domestic scholars have also carried out some qualitative research and a large number of quantitative research. Most of these previous studies are based on the existing theoretical results abroad, while taking into account the actual economic conditions in China, and using mature empirical analysis methods abroad to reach very valuable conclusions that meet the specific conditions of China.

(2001) Using the econometric model of the mechanism of financial development and economic growth and using relevant data in the process of economic development in China to conduct an empirical analysis, it is believed that technological progress and institutional innovation are the most critical factors of economic growth, and The effect is extremely limited.

Shi Yongdong (2003) used the Granger causality test and econometric analysis based on the Cobb-Douglas production function framework to conduct an empirical study on the relationship between China's financial development and economic growth. It is concluded that there is a two-way causal relationship in the sense of Granger between China's economic growth and financial development. At the same time, specific values of the contribution of financial development to economic growth are obtained.