Financial Markets and Endogenous Growth

This chapter proposes and implements simple plausible frameworks for studying jointly some basic elements of endogenous growth that relate to the main aspects of the behaviour of financial markets. In particular, the paper makes several contributions. First, it extends a model of a Lucas (1988), Romer (1989) and Pagano (1993) type endogenous growth economy in order to incorporate the effects of financial markets. It is shown that endogenous growth partly derives from the behaviour of economic agents in the markets for credit (loans), bonds, and stocks (shares). Second, the model is estimated and tested on the fast-growing Pacific Basin countries in a novel application of the Zellner (1962, 1963) procedure in addition to the single equation OLS method. The novelty of the estimation and testing procedures is that we are able to study country-specific as well as cross-country features of financial markets and endogenous growth with reference to Hong Kong, Indonesia, Korea, Malaysia, the Philippines, Singapore and Thailand. Third, we also estimate and test other plausible models that can be regarded as alternatives to our basic model. Specifically, the models considered are the baseline as well as the augmented variants of the Dowrick (1992) growth accounting exercises and the Atje and Jovanovic (1993) model. In general, the country­ specific as well as the cross-country evidence obtained sheds light, not only on the endogenous growth phenomena in the Pacific Rim, but also on the contribution of financial markets to the growth process. Finally, the paper offers scope for further research, in particular regarding estimation and testing of models of the King-Levine (1993) variety. ²