The relationship between financial development and economic growth: Singapore 1978-2006

The study of the causal relationship between financial development and economic growth has been a topic of keen interests and controversy. Past studies provide mixed evidence on the direction of causality in the finance-growth nexus. This thesis examines the relationship between financial development and economic growth in Singapore. As a longitudinal study, it also examines whether the finance-growth relationship changes over time, particularly when subjected to major shocks. The research employs vector auto-regression analysis on time-series data over the period 1978-2006, with in-depth analyses in the sub-periods 1978-1996 and 1998-2006 which are separated by the 1997 Asian financial crisis. From the perspective of banking sector development, the study found negative bi-directional causality between banking activities and economic growth in Singapore, with the finance-growth nexus becoming more volatile after being subjected to major shocks such as the 1997 Asian financial crisis. From the perspective of stock-market development, the study indicated positive bi-directional causality between stock-market activities and economic growth in Singapore, with the mutually beneficial linkages between the stock-market and the real economy becoming less persistent after the 1997 Asian financial crisis. The implications of the results for theory and policy are discussed and areas for further research are also highlighted.