Financial development and economic growth: the case of Taiwan

Abstract

This paper examines the relationship between financial development and economic growth in Taiwan from 1962 to 1998. Using a four-variable VAR model, the competing hypotheses of demand-following versus supply-leading are empirically tested. The results from Granger causality tests based on vector error-correction models (VECM) suggest unidirectional causality running from financial development (measured as the ratio of M2 to GDP) to economic growth. This result supports the supply-leading hypothesis for Taiwan. This finding highlights the importance of financial development in Taiwan's recent growth.