Stock Markets and Economic Growth: A Casualty Test

Abstract:     
This article examines causality relationships between stock markets and economic growth based on the time series data compiled from 20 countries for the years 1981 through 1994. Sims' causality test based on Granger definition of causality was used. At first, panel data covering all countries over the entire analysis period were used to detect the direction of causation. Secondly, causal relations were investigated for each country,in isolation, using the respective time series data.

Analysis based on the panel data revealed a two-way causation between stock market development and economic growth. Country analyses, on the other hand, could not lead to precise conclusions, but suggested a somewhat stronger link between stock market development and economic growth in developing countries.

Keywords: stock market development, economic growth, financial development

JEL Classifications: O16

Accepted Paper Series