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The IUP Journal of Applied Finance
Banking, Stock Market and Economic Growth in Four ASEAN Countries: Evidence from Linear and Nonlinear Methods
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This study utilizes size and activity to measure the development of the banking sector and stock market. Both linear and nonlinear Granger causality tests are used to examine the causality between variables. The results computed from linear and nonlinear Granger causality tests are compared with the residual series, indicating violation of identically and independently distributed (i.i.d.) assumptions and causing the linear causality result to be biased. Therefore, nonlinearity Granger causality test is concluded as more appropriate in examining the causal relationship between variables. This finding can be included by policymakers and governments in their further researches for future planning and policy making to strengthen banking, stock market and economic growth.

 
 
 

In theoretical studies, the relationship between financial development and economic growth can be classified into three major categories. The first category is finance-led growth where a well-developed financial system allocates financial resources to most productive use and thus enhances the economic growth (Schumpeter, 1912). The second category is growth-led finance where bank does not impact growth and the development of bank follows economic growth given that the expansion of economic growth increases the demand for services provided by the institution (Robinson, 1952). The last category is the absence of significant causal relationship between bank and economic growth due to the relationship between variables being exaggerated by researchers (Lucas, 1988).

 
 
 

Applied Finance Journal, Banking, Stock Market and Economic Growth, Linear and Nonlinear Methods