Credit, Bonds, Stocks and Growth in Seven Large Economies

Abstract

We use annual real GDP and the volume of the bond, stock and credit markets to assess the causal relationship between the aggregate bond market development and economic growth in the USA, Japan, Germany, Great Britain, Italy, France and the Netherlands over the 1950 to 2001 period. The literature on the real - financial nexus to date has focused on the credit and stock markets, with few exceptions. Partially due to data availability problems, the impact of bond markets on economic growth has not yet been examined in the same way. To fill this gap we provide empirical evidence for long-run equilibrium and Granger causality in at least one direction in the relationship among real GDP and bond, credit and stock markets in seven economies with large bond markets. The supplyleading hypothesis that development of the financial markets enhances growth is supported in all countries except for Germany. The demand-leading hypothesis that economic development pulls the development of the financial markets is supported only for Germany. A feedback between domestic credits and output is found in Japan. There is evidence for a feedback between the equity markets and real output in Japan and the Netherlands.

Keywords: bond markets, economic growth, Granger causality

JEL Classification: E44, O16, O40