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...cointegrated vector among functions of stock market, the banking sector development and economic growth. Granger causality tests have shown that there is a bilateral causal relationship between banking sector development and economic growth and a unidirectional causality between economic growth and stock market development whereas there is no causal relationship between the stock market and banking sector development.
JEL Classification Numbers: O11, C22
Key words: credit market, economic development, Granger causality, Greece, stock market
1. Introduction
In recent years, development issues are at the forefront. Many academicians consider the role of financial sector--banks and capital markets--to be more striking in the development process. Technological innovation and radical changes in various sectors in many economies brought a widespread euphoria to the economic performance of many countries. Greece is one of the EU members that can be characterized as an emerging market, having experienced a number of facts that truly justifies this characterization.
After joining the European Monetary Union (EMU) and adopting the new currency, euro, in 1 January 2001, the Greek economy operates in a new monetary environment. The progress that was achieved in terms of low inflation, the improvement of fiscal policy of Greece and the enlargement and upgrade of production potential has already formed more suitable conditions for development. In 1996, the Greek stock market reached its highest point of development. Not so much concerning prices but other areas, such as:
* Market capitalization has reached 120% of GNP
* The contribution of foreign institutional investors
* The raising of capital from the primary market
Furthermore, financial innovations and technological transformations, in view of the modernization of networks, ATM's, Internet and mobile telephony in Greek banks as well as the integration within the European and Monetary Union, created a radical reorganization of banking environment. "Another characteristic of the changing landscape in recent years has been the withdrawal of the state" (Garganas, 2003), taking the form of statutory liberalization and privatization. It will be an omission not to mention "the expansion of Greek banks in the Balkans and the South Eastern Mediterranean. Many domestic banks have now realized that these markets, although still in financial uncertainty and dominated by political considerations, have significant potential for growth in the long run" (Karatzas, 2000).
2. Literature review
The relationship between stock and credit market and economic development had become an issue of extensive analysis. The question is whether stock and credit market precedes or simply follows economic development. Evidence, on whether finance cause growth, help to reconcile these views.
The theoretical framework goes back to the study of Schumpeter (1912) who emphasizes the positive influence of the development of a country's financial sector on the level and the rate of growth and argues how necessary for economic growth are the services that financial sector provides--of reallocating capital to the highest value use without substantial risk of loss through moral hazard, adverse selection or transactions costs.
Lewis (1955), one of the "pioneers" of development economics, postulates a two-way relationship between financial development as a consequence of economic growth which in turn feed back as a stimulant to real growth. Jung (1986) investigates the causal relationship between financial development and economic growth. He uses data on 56 countries, of which 19 are developing and the rest are characterized as less-developing countries (among them is Greece). Jung mostly based his results and conclusions on the "demand-following" hypothesis and the "supply-leading". He focused on the causal relationship between the DC and LDC countries and also among the LDC only. He found out that the LDC countries have a supply-leading causality which means that there is a causal relationship from financial development to economic growth whereas for DC the reverse causal direction occurs.
Empirically, King and Levine (1993) show that the level of financial intermediation is a good predictor of long-run rates of growth, capital accumulation and productivity. In addition, well-developed stock markets can easily lead to economic development through its enhanced liquidity as the investors diversify their risk in different shares creating a portfolio with high return investments, thus accelerating productivity growth.
Levine and Zervos (1993) suggest that stock market development is strongly correlated with growth rates of real GDP per capita and real physical capital per capita. Most importantly, they found that both stock market liquidity and banking development predict the future growth rate of economy when they both enter the growth regression.
Wachtel and Rousseau (1995) examined the relationship between finance and growth in the USA, UK and Canada in a long-run perspective. Briefly they found a robust correlation between the financial sector and economic growth, although the correlation is not significant for every type of intermediation. Their tests for Granger-causality demonstrate that financial development causes economic growth. However, because the variables are non-stationary...
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