DYNAMIC INTERACTIONS BETWEEN FINANCIAL SECTOR DEVELOPMENT AND ECONOMIC GROWTH: VAR ANALYSIS ON THE CASE OF NORTH MACEDONIA
Keywords:
economic growth, stock market capitalization, domestic credit growth, VAR, granger causalityAbstract
Stock market capitalization and domestic credit provided by banks are of crucial importance for economic growth, due to their roles in investment, consumer spending, and economic stability. A well developed stock market allows companies to raise capital more easily, which they can further invest in new projects, expansion, and innovation, thereby contributing to economic growth. A robust stock market also reflects investor confidence, leading to more investments, and efficient channeling of funds. Additionally, rising stock market values creates a wealth effect, where investors feel wealthier and are more likely to spend more money, thereby boosting GDP growth. On the other hand, domestic credit is vital for business expansion and consumer spending. Access to credit enables businesses to invest in new ventures, and encourages and supports entrepreneurs to invest in innovation, again leading to higher output and GDP growth. Moreover, a well functioning credit system helps smooth out economic fluctuations by providing liquidity during downturns and supporting growth during upturns, ensuring sustained economic growth. Therefore, the purpose of this research paper is to investigate the relationship and interactions between stock market capitalization, domestic credit (both as proxies for financial sector development), and economic growth in North Macedonia. By employing a Vector Autoregression Model (VAR) and Granger Causality Test, the findings of this paper narrow down to that in the case of North Macedonia, the interaction between stock market capitalization and domestic credit create a positive feedback loop, where a growing stock market increases credit availability, further stimulating economic growth. Therefore, policymakers should focus on strengthening financial markets and institutions, with additional focus and accent on capital markets, by fostering financial innovation and improving regulatory frameworks, to support economic growth. Additionally, efforts to enhance financial literacy and inclusion can further amplify the positive effects of financial sector development on economic growth.
References
Alshubiri, F.(2021). The Stock Market Capitalisation and Financial Growth Nexus: An Empirical Study 0f Western European Countries. Future Business Journal, 7 (46). https://doi.org/10.1186/s43093-021-00092-7
Demirgüç-Kunt, A. (2006). Finance and Economic Development: Policy choices for developing countries (Policy Research Working Paper No. 3955). The World Bank. https://documents.worldbank.org/curated/en/825071468316170479/pdf/wps3955.pdf
Dibor-Alfred, C., Somoye, O.A. & Ozdeser, H. (2023). Stock Market Performance and Economic Growth: Empirical Evidence from Nigeria Employing the ARDL Approach. SN Business&Economics. Vol. 3. https://doi.org/10.1007/s43546-023-00603-4
Ekanayake EM, Thaver R. (2021). The Nexus between Financial Development and Economic Growth: Panel Data Evidence from Developing Countries. Journal of Risk and Financial Management, 14 (10). https://doi.org/10.3390/jrfm14100489
Levine, R., & Zervos, S. (1998). Stock Markets, Banks, and Economic Growth. The American Economic Review, 88(3), pp. 537–558. http://www.jstor.org/stable/116848
María A. Prats and Beatriz Sandoval (2020). Does Stock Market Capitalization Cause GDP? A causality study for Central and Eastern European countries. Economics: The Open-Access, Open-Assessment E-Journal, 14 (17), pp. 1– 29. http://dx.doi.org/10.5018/economics-ejournal.ja.2020-17
Naik, P.K. and Padhi, P. (2015). On the linkage between stock market development and economic growth in emerging market economies: Dynamic panel evidence. Review of Accounting and Finance, Vol. 14 (4), pp. 363-381. https://doi.org/10.1108/RAF-09-2014-0105
Saiti, D., & Trenovski, B. (2021). The impact of the private sector credits on the economic growth in the Republic of North Macedonia. Knowledge - International Journal, 45(1), 286-325
Spaseska, T., & Hristoski, I. (2022). How do the macroeconomic determinants underpin the capital market development in North Macedonia? Management & Marketing. Challenges for the Knowledge Society, 17(2), 286-325.
Spaseska, T., Vitanova, G., Sotiroski, K., Odzaklieska, D., Risteska-Jankuloska, A., & Risteska, F. (2017). The impact of Macedonian stock exchange performance on economic growth in Republic of Macedonia. International Balkan and Near Eastern Social Sciences Conference Series, 3, 13-25.
Yemelyanova, L. (2021). Relationship Between the Stock Market Development, Banking Sector Development and Economic Growth In the Cee Countries. Baltic Journal of Economic Studies, Vol.7 (3). pp.118-126. https://doi.org/10.30525/2256-0742/2021-7-3-118-126
