A comparative study of bank based and marketbased financial systems which where and when is better for economic growth

Abstract

The present study examined the relative importance of the bankbased and market-based financial systems in economic growth. It emphasizes on which of these two systems contributes to higher economic growth, both in developed and developing countries. And also which one better perform in economic growth recovery from the 2008-economic crisis. For empirical investigation data of required variables are collected of fifty countries. The data of the variables are mainly collected from World Development Indicators (WDI) for the period 1980 to 2015. The developed and developing countries are classified on the basis of World Bank cut-off of standard minimum of high-income countries, that is, $12225 per capita annual income in 2010. The financial structure, whether bank-based system or market-based system is determined by using Principal component analysis (PCA) technique separately for set of developed and developing countries. The financial structure of the countries is determined on the basis of computed financial structure index. We have applied panel data regression technique. Further, for robustness we also applied GMM techniques in the same set of data-frame. To examine the third objective, we developed the definition of downturn and recovery given the data. Then we applied bivariate regression technique for estimation. In the study it was found that development of financial system spurs economic growth. The countries with market-based system recorded higher economic growth compared to bank-based economies. Further, stock market contributed in economic growth of both developed and developing countries. However, development of banks depressed the economic growth in developed countries and contributed in economic growth in developing countries. The empirical analysis indicates that financial structure has not played significant role in rapid recovery from 2008- economic crisis. newline