The finance-growth nexus and stock market infrastructure in Bangladesh, 1980-2007
This thesis attempts to investigate, theoretically and empirically, whether financial development (bank development and stock market development) has led to economic growth in Bangladesh, and it explores the important factors behind the evolution of the financial system itself. The literature survey in Chapter 2 argues that finance enhances growth while banks and stock markets are complementary in development; however the application to low-income countries is unclear. After reviewing financial sector policy and institutional background in Bangladesh in Chapter 3, a combination of various theoretical insights into one structural framework is proposed in Chapter 4. Our empirical findings for Bangladesh in Model l using the ARDL cointegration method are as follows. Both banks (quasi-money/GDP) and the stock market (number oflisted companies) have enhanced physical capital accumulation from 1980 to 2005. Using the same cointegration technique, growth in GDP per capita is found to lead to growth in banks (private-credit/GDP ratio). And there is a cointegrating relationship between banks and the stock market which indicates that debt and equity are complementary. The main message from Chapter 6 is that the finance-growth nexus can be shown to operate in the case of Bangladesh where banks are the main providers of finance. The key policy implication of Model l is that overall financial development (banks and stock markets) can lead to economic growth, while feedback effects promote further financial activity. We then identify and assess relationships that operate within the stock market itself. Model 2A begins the analysis of the stock market infrastructure by relating the number of listed shares to the value of traded shares or turnover (market liquidity). Empirical results in Chapter 7 for Bangladesh using the ARDL approach show support for cointegration from 1990Ql to 2005Q4. Model 2B then investigates the relationship between trading activity and price volatility on the stock exchange. Using a GARCH framework and Granger Causality tests, empirical results in Chapter 8 indicate that trading volume and particularly trading value carry predictive power for price volatility with daily data from 1995 to 2007. The overall conclusion in Chapter 9 is that to understand the finance-growth nexus in Bangladesh it is necessary to appreciate the essential role played by banks as well as the forces behind the stock market. The encompassing framework presented here along with its reinforcing and constrained features points to a growth-promoting and sustainable fmancial structure for central bank regulators to target.