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Based on VAR Model of Financial Development and Economical Growth in Jiang Su Province

Author: ZhangHong
Tutor: SunChunYan
School: Nanjing University of Finance and Economics
Course: Applied Mathematics
Keywords: financial development economic growth VAR model cointegration VECmodel Granger causality tests impulse response variance decomposition policy suggestions
CLC: F832.7;F127
Type: Master's thesis
Year: 2011
Downloads: 271
Quote: 1
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Economic growth in relation to a country’s social development and political stability. Financial development and economic growth of the interaction is the eternal hot on the academic research, different areas of different nations have interaction between direction and degree general differs somewhat. The paper take advantage of Jiangsu 1988 to 2009 the relevant economic and financial data and establishing a mathematical model to study Jiangsu financial development and economic growth relationship issues.Full text content is divided into five chapter unfolding. The first chapter is introduction. This paper briefly expounds why to choose the background and research significance, the research content framework and research approaches, and gives the paper possible innovations and deficiencies. The second chapter is definition and the literature review. On the basis of the economic growth and financial development concept unity .Summarizing the academic researches on economic growth and financial development relationship of several theoretical viewpoints, and some research on the home and abroad are reviewed in the paper. The third chapter is Jiangsu financial development and economic growth by the basic statistics, since 1988 to 2009 reflect economic development and financial growth related indexes variable trend and mutual relationship characteristics , providing the basic direction for model.The fourth chapter are the VAR model and empirical analysis of Jiangsu province financial development and economic growth. It’s the core content of paper. After the model and inspection method,is given ,the indexs of Jiangsu province are selected from 1988 to 2009, per capitaGDP growth rate ( RGDP ), financial related rate ( FIR ), financial intermediary rate ( FM ), The degree of Security ( S /GDP) and insurance development level ( INSURE ) growth as index variable,and then a comprehensive and systematic model is established and analysed. Concrete work and conclusions are mainly embodied in the following aspects: (1) After the pretreatment of logarithm of original sequences for Jiangsu province, established financial development and economic growth without constraint VAR model, successively conducted VAR model of definite order, parameter estimation, static and dynamic simulation, and the simulation of VAR model stability of inspection. The conclusion is: according to lag length criterion for lag is 2, it provides basis for vector cointegration test and vector error correction model. At the same time via examination, knowing the VAR model is stable, providing necessary conditions for impulse response function and variance decomposition,according to the dynamic simulation and static simulation effect see necessary of vector error correction. (2)we establish the vector cointegration test and vector error correction model (VEC) for Jiangsu province financial development and economic growth series. Successively, Johansen ADF stationarity test、cointegration test and vector error correction are conducted,. First, through the ADF test,we found variables LNFIR、LNFM、LNINSURE、, and LNS /GDPto LNRGDP as one-order single whole sequence. Second, we get the five variables aboved have a long-term equilibrium relationship by Johansen cointegration test,so we established the long-term equilibrium model for Jiangsu financial development and economic growth.According the model, estimating the variables LNFIR、LNFM、LNINSURE、, and LNS /GDP to LNRGDP long-term influence coefficients are 7.1384, 6.0001, -5.6017, and - 0.442, these coefficient separately reflects variables LNFIR、LNFM、LNINSURE、, and LNS /GDPto LNRGDP right direction and effects. From that we know, in the long run, Jiangsu’s, LNFIR , LNFM and LNRGDP have positive correlation which means the amplification of financial institutions bank assets and the allocation of financial resources with higher efficiency, so as to promote economic growth. And at the same time, LNINSURE、LNS /GDP and LNRGDP also have negative correlation, it is due to the Security market and insurance market’s founded time is late and its development is not perfect. Thirdly, through the vector error correction established the short-term dynamic model about financial development and economic growth in Jiangsu province (VEC model) and from the model parameter estimation results we know that how the short changement of one of variables LNFIR , LNFM LNINSURE and LNS /GDP is influenced by several other variables short-term fluctuations and deviation long-term equilibrium. When the above five variable changes and deviating from the long-term equilibrium, we will use the adjustment speed by 0.0875, 0.1299,-0.0031,-0.1285,-0.2501 respectively (including the magnitude and direction)to come back to equilibrium. (3)We make Granger causality test about financial development and economic growth in Jiangsu province. The conclusions as follow: when the lag time is three periods, Granger causality test is basically stable, LNFM is LNFIR one-way Granger reason, LNFIR and LNRGDP are Granger reasons mutually and LNFM is LNS /GDP one-way Granger reasons. These results and above models can mutually confirm. (4) On the basis of unconstrained VAR model, we analysis the impulse response function, and get some significant conclusions. Through the analysis above we get such conclusions as follows:after given positive standard deviation to each of the financial variationin of LNFIR、LNFM、LNINSURE、LNS /GDP respectively, we get a diagram about the impact of variable impulse response function to the economic growth LNRGDP , which can reflect the dynamic effect on different periods of economic growth in the financial development .Also,it discussed the impulsive effect that the financial LNRGDP makes to the variable LNFIR . To a certain extent, it can also reflects the dynamic effects on the economic growth of financial development in differrent periods .In above, all the analysis of the impulse response function can further clarify Jiangsu’s financial development and economic growth . (5)In the thesis,we undergo variance decomposition analysis. Through the analysis we got that: 34.43%of the income per capita GDP growth depend on its own internal development , of which the level change of FIR , FM and LNINSURE has great impacts on RGDP , it has achieved respectly to 17.89%, 23.59% and 21.57% in the long term. This shows that financial institutions has developed relatively perfect, and the finical financing and monetary circulation has provided a lot of capital to the economic growth. Therefore,its explaining capacity is comparatively big. However, S /GDP level changes have little impact on RGDP explanation capabilities and the contribution is also lower. This may be due to the short period development of the card industry , and because of its imperfection itself ,it has little impact on economic growth ,so was its contributions.The fifth chapter in the thesis summarizes the results obtained through the model, and gives the corresponding policy and recommendations.

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