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University of Minnesota
Financial Development and the Effect on Income Growth in OECD
Countries:
An Empirical and Theoretical Investigation
Madison Whalen
ECON 4331W
Neha Bairoliya
March 2, 2015
I.
Introduction
A. Intro information
This paper seeks to examine the level of financial development and its effect on the
growth rate in GDP per capita across the 34 OECD member countries. This theory
will be examined using an Ordinary Least Squares (OLS) regression in hopes of
finding results that may give some insight to countries struggling with slower growth.
B. THESIS
Higher levels of financial development as shown by equity market, retail
banking and insurance market indicators are a contributing factor to growth in
a country’s GDP per capita.
C. The main results this paper seeks to prove are:

Higher levels of investment in financial instruments such as loans, equities, and
insurance indicate a more financially developed economy that should grow faster
due to the higher savings (investment) levels.

Certain types of investment, whether it be equities, retail banks, or insurance,
should have a more significant effect on GDP per capita growth, and the
regression will allow us to determine which factors are more influential.
II.
Theoretical Analysis
A. Higher investment should lead to higher growth, which is much more prevalent in
nations that have a stronger level of financial development. Many smaller countries
do not have the resources available to provide capital in the form of loans to
businesses and people, which slows down the overall growth of the country.

Solow model shows higher output per capita (log(y)) when savings (s) increases
as well as an increase (potentially short term) in yo/y, the growth rate of output
over time.

Higher investment leads to a higher money supply, creating more economic
activity as it passes through the financial system. (Multiplier effect)
B. Scholarly research

This finding is similar to those of the empirical analysis of financial regulation
and economic growth published by the OECD. (de Serres et al.)
III.

Survey on finance and growth (Levine)

Findings in Greece (Dritsakis and Adamopoulos)

Findings in India (Chakraborty)
Empirical Analysis
A. Hypothesis to be tested

Higher levels of financial development as indicated by the data will show
statistically significant high levels of correlation to higher GDP per capita growth
rates.
B. Model

OLS Regression:
𝐺𝐷𝑃 𝑝𝑒𝑟 𝑐𝑎𝑝𝑖𝑡𝑎 𝑔𝑟𝑜𝑤𝑡ℎ𝑖
= 𝐶𝑜𝑛𝑠𝑡𝑎𝑛𝑡 + 𝛽1 𝐵𝑎𝑛𝑘𝐷𝑒𝑝𝑜𝑠𝑖𝑡𝑠𝑖 + 𝛽2 𝐹𝑖𝑛𝑎𝑛𝑐𝑖𝑎𝑙𝑆𝑦𝑠𝑡𝑒𝑚𝐷𝑒𝑝𝑜𝑠𝑖𝑡𝑠𝑖
+ 𝛽3 𝑆𝑡𝑜𝑐𝑘𝑀𝑎𝑟𝑘𝑒𝑡𝐶𝑎𝑝𝑖𝑡𝑎𝑙𝑖𝑧𝑎𝑡𝑖𝑜𝑛𝑖 + 𝛽4 𝐼𝑛𝑠𝑢𝑟𝑎𝑛𝑐𝑒𝐶𝑜𝑚𝑝𝑎𝑛𝑦𝐴𝑠𝑠𝑒𝑡𝑠𝑖
+ 𝛽5 𝑆𝑡𝑜𝑐𝑘𝑀𝑎𝑟𝑘𝑒𝑡𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟𝑖 + 𝛽6 𝐿𝑖𝑓𝑒𝐼𝑛𝑠𝑢𝑟𝑎𝑛𝑐𝑒𝑃𝑟𝑒𝑚𝑖𝑢𝑚𝑖

Data obtained from The World Bank database in percentage values for all 34
OECD countries for most variables.
C. Reasoning Behind Model

Bank deposits and financial system deposits – retail banking indicators

Stock market capitalization and turnover rates – equity market indicators

Insurance company assets and life insurance premiums – insurance market
indicators
D. Data Examination

Regression results

Data tables and plots
E. Results of the test

IV.
Is the hypothesis verified with statistical significance?
Conclusion
A. Recap of results – is the hypothesis true?

Restatement of thesis
B. Which factors are and are not influential

Retail banking

Insurance

Equities
C. Comparison of results to other studies
D. Implications of results for countries outside the OECD
E. Comments
Bibliography
Alain de Serres, et al. (2007), "Regulation of financial systems and economic growth in OECD
countries: An empirical analysis", OECD Economic Studies, Vol. 2006/2.
Ross Levine, (2004), “Finance and Growth: Theory and Evidence”, National Bureau of Economic
Research Working Papers Series, Vol. 10766, http://www.nber.org/papers/w10766
Nikolaos Dritsakis & Antonios Adamopoulos, (2001) "Financial development and economic
growth in Greece: an empirical investigation with Granger causality analysis", International
Economic Journal, Taylor & Francis Journals, vol. 18/4, pages 547-559.
Indrani Chakraborty, (2010) “Financial Development and Economic Growth in India: An
Analysis of the Post-reform Period “, South Asia Economic Journal, vol. 11/2, pages 287-308.
The World Bank. World Development Indicators (WDI) Online. Retrieved February 28, 2015.
Appendix
A summary of the data used can be seen by the values in the chart below. The paper will also
examine the growth and change year over year as well as the yearly level of the following six
explanatory variables.
120
100
Bank Deposits to GDP %
80
Financial System Deposits to
GDP %
60
Stock Market Capitalization to
GDP %
40
Insurance Company Assets to
GDP %
Stock Market Turnover Ratio
%
20
Life Insurance Premium
Volume to GDP %
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
0