Since the reform and opening up, China’s economic growth and financial development have made remarkable achievements. Based on the macroeconomic data from 1992 to 2012, this paper studies the relationship between China’s financial development and economic growth from the perspective of empirical analysis. Based on the value at risk model, Granger causality test is carried out on the variables of financial development and economic growth to analyze the relationship of interaction. A vector error correction model is established to estimate the parameters of each variable. The interaction between variables is further analyzed. The conclusion is that there is a mutual promotion mechanism between finance and economy in China, and economic growth can significantly promote the level of financial deepening.
Financial development can promote economic growth, and finance has gradually become the “first driving force” of contemporary economic growth in the developed countries of the world. At the same time, the rapid development of the economy objectively requires the support of the financial system, and economic growth can also promote financial development [1]. Therefore, many scholars believe that financial liberalization and financial liberalization should be achieved. But whether financial liberalization is bound to adapt to the economic development of each stage should not be summarily concluded. Some scholars point out that financial liberalization has many risks. Can our financial system effectively avoid and defuse the risks caused by financial liberalization? Can economic individuals under the financial system bear the risk losses caused by financial liberalization? Does the development of China’s financial industry meets the requirements of China’s economic system? Is China’s growing economy really dragging the growth of our economy? From the perspective of theory and the economic development of the developed countries in the world, economic development is closely related to financial development. However, financial deepening in the process of financial development can promote the economic development of national macroeconomic policies and the economic thrust of financial scale development. Which one plays a leading role in the historical trend? This paper attempts to analyze the financial development and economic development of China’s direct financing market to explore the impact of financial deepening development on the economy. If financial deepening can effectively drive economic development, then what stage of economic development will the financial deepening have the most obvious effect on the economy?
2 State of the art
However, the relationship between financial development and economic growth in China started late. Although the theoretical research has been expanded, in general, there is insufficient innovation in the field of financial development theory. However, it still provides a lot of constructive guidance and theoretical basis for the development of China’s domestic financial system. For example, at the macro level, Wang Zhaoxing proposed the theory of China’s financial structure. The theory shows that under the condition of socialist market, economy only adjust the structure of a good financial system and give full play to the financial system regulating function to meet the needs of the socialist market economy with Chinese characteristics; at the micro level, Fan Gang and others proposed that the economic development needs competitive financing to provide financing services for enterprises rather than the allocation of government funds. Moreover, most theories or empirical studies are based on the correlation between financial development and economic growth after 1978. It is concluded that financial development such as the expansion of financial scale and structural adjustment will drive the growth of the economy, such as the increase of savings, the efficiency of investment conversion, and the efficiency of capital utilization. At the same time, economic growth can lead to the conclusion of financial development [2]. At the same time, most models only define financial correlation ratio (FIR) as the proportion of broad money in GDP. Much of the financial structure considered is limited to commercial banks. It ignores the growing and prominent role of the Chinese financial market, the bond market, the insurance market, the trust, and other financial institutions and financial markets. Domestic empirical research is similar to foreign empirical research. It is basically based on a panel model, a linear model, and a time series based on an unbalanced economic development in our region [3].
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3 Methodology
3.1 Pegaloo algorithms for the interaction between financial development and economic growth
Before establishing the model and selecting explanatory variables and explanatory variables, it is necessary to understand the financial development and economic growth of our country. It is also necessary to understand the possible mechanism of interaction between them, and combining with the specific situation of our financial system can help to further analyze the model. Finally, a scientific econometric model is established [4]. Economic growth is defined in economics as the continuous increase in material goods and services produced in a country or region. It means the expansion of economic scale and the increase of production capacity can reflect the growth of the economic strength of this country or region. Indicators of economic growth in our country are usually measured in terms of GDP, GNP, or their per capita or growth rate. Financial development refers to the short-term and long-term changes of financial structure. It is not only the comparison of the financial structure at different time points but also the change of financial transaction flow in each successive period [5]. The financial structure refers to the form and scale of all financial institutions and financial instruments in the financial market. In other words, financial development refers to the continuous evolution of financial institutions and financial instruments. Specifically, it represents the expansion of the financial scale and the improvement of financial deepening level [6]. Since the theory of financial development, many economists have studied the contribution of finance to the economy. The endogenous growth model used by Pegaloo was the most classic, which was highly praised by many economic scholars. In the case of the most simplified endogenous growth model, he perfectly revealed the role of the financial system in promoting economic growth. The following is a brief introduction to the model and its related conclusions; assume that total output is a linear function of total capital stock, a model premise assumption; and the economy of the two sectors and the size of the regional population are unchanged. The region produces only one commodity. This commodity can only be used for investment or consumption if used for investment in fixed δ. The conversion rate of saving investment is X. The total investment is:
When St = Lt, the market reaches equilibrium and stable state, and then the economic growth rate of the equilibrium state can be obtained (where S is the amount of savings converted into investment):
$$ g= AS/Y-\delta \left(\cdot \right) $$
(2)
3.2 Vector autoregressive model algorithm
The value at risk (VAR) model is introduced into econometrics by Simms, which is used to predict and analyze the dynamic impact of random perturbations on the system and its magnitude, positivity, and duration. The modeling method of vector autoregressive model overcomes the disadvantages of the modeling method of traditional econometrics. For example, there is no obvious distinction between endogenous variables and exogenous variables during modeling. The model is not included in the model’s endogenous variable interference, which leads to the complexity of the model or the problem of poor recognition and the interaction between the variables. VAR model was widely recognized and applied at the beginning of the introduction of econometrics. It has been proven that economic growth, financial institution size level, financial deepening level, and that four economic variables of government expenditures have been closely linked with each other by analyzing the descriptive statistics and the results of the gels causal inspection. Therefore, it is impossible to determine exactly which variable is the exogenous variable of the model. Using the advantages of the regression model, the VAR model is the basis of empirical research [7]. In the post, the econometric significance and calculation results of each step are listed in detail. Before the VAR (P) model is established, the lag period of the model must be established [8]. The following methods are used to determine the lag number P of VAR model: AIC, SC information, criterion, and maximum likelihood ratio, using Eviews5.0.
Under the limitation of the sample size, the maximum lag time of this model is 3. Otherwise, there will be a large parameter estimation deviation due to the insufficient sample size, leading to the wrong conclusion. According to the results of the operation, the minimum value of AIC and SC information is obtained when the model lag number is selected as 2, at the same time, likelihood ratio test LR value to take the biggest. Conclusion: when P = 2 is the most consistent with this sample, the VAR (2) model is selected. The model of VAR (2) based on Eviews5.0 is as follows: (the result of the operation is appendix), in which LNPRGDP is chosen as the dependent variable:
In the previous co-integration test, the four endogenous variables in the VAR (2) model have a long-term co-integration relationship, and the optimal equation of likelihood ratio test is selected to list the co-integration equation (Fig. 1). The VEC model has good predictability compared with the unconstrained VAR model. The estimated equation of VEC model is consistent with the chosen likelihood ratio:
From the equation of VEC model, it can be seen that the economic growth indicators and financial development indicators show the same trend of change from the long-term relationship. In this paper, Eviews5.0 is used for model building, testing, and prediction. The test method of augmented Dickey-Fuller test (ADF) in the unit root test is adopted in the test time series stationarity, and the maximum lag order is 4. The following results are shown in Tables 1 and 2:
Table 1
Lag test results
P
AIC
SC
LnL(P)
1
− 12.93838
− 11.94265
149.3838
2
− 16.000651
− 14.21119
188.0062
3
− 15.002246
− 12.45027
162.2021
Table 2
Unit test results
Variable
t statistic
P value
1% threshold
5% threshold
10% threshold
LNPRGDP
2.070981
0.9996
− 3.920350
− 3.065585
− 2.673459
D(LNPRGDP)
− 4.225075
0.9991
− 3.920350
− 3.065585
− 2.673459
LNFIN
− 4.225076
0.9992
− 3.920350
− 3.065585
− 2.673459
D(NFIN)
− 4.225077
0.9993
− 3.920350
− 3.065585
− 2.673459
LNFIR
− 4.225078
0.9994
− 3.920350
− 3.065585
− 2.673459
LNGOV
− 4.225079
0.9995
− 3.920350
− 3.065585
− 2.673459
D(LNGOV)
− 4.225080
0.9996
− 3.920350
− 3.065585
− 2.673459
4 Result analysis and discussion
The development trend of each variable is observed before the model is established. Due to the high volatility of economic variables, the four indexes of FIN, FIR, GOV, and PRGDP are calculated by natural pairs in order to reduce the impact of random volatility. The figure shows the annual variation of the four variables in the country. It can be found that several variables show an obvious upward trend. FIN, FIR, and GOV grew rapidly in the mid-1990s to the early 2000s, especially after 96 years. At the same time, the GDP per capita in the whole observation range is stable. It can also be seen in the diagram that several time series are likely to be autocorrelated, and there may be a little correlation between variables. The correlation between the sequences was determined by time series stationarity test and Granger causality test.
Figure 2 shows the variation trend graph of three variables of financial correlation ratio (FIR) decomposition. It can be observed that the ratio of M2 to GDP, as well as the ratio of stock currency and bond market to GDP, also has an upward trend. But the M2 and bond markets have been relatively flat. And the stock market is affected by the stock price and other factors.
Fig. 2
Stability test
×
According to the ADF, test results can be concluded that LNPRGDP, LNFIN, LNFIR, and LNGOV are the four variables to the original sequence by stationarity test. Their t statistic values are all above the threshold of significance level. However, their first-order differential variable D(LNPRGDP), D(LNFIN), D(LNFIR), and D(LNGOV) ADF test t statistics are all less than the threshold value of 596 confidence and reject the original hypothesis. The four first-order difference variables are stable. It can be concluded that there is only one unit root in all four sequences, which is the conclusion of a single order sequence. The graphic observation and sequence stationarity test were performed through the descriptive statistical stage. It can be found that the indicators of economic growth and financial development indicators are closely related to the development trend. What is the causal relationship between China’s financial development and economic growth? Whether financial development contributed to economic growth or the need for economic growth caused financial development. Or the relationship between financial development and economic growth is mutually reinforcing. Or are they just similar in time series but have no real causality? In this paper, the relationship between the two granger causality test methods is generally judged. The test results are shown in Table 3:
Table 3
Results of the Granger causality test between LNPRDGP and other indicators
Null hypothesis
F statistic
P value
1
PRGDP
1.47842
0.26151
2
FIN
2.53865
0.11462
3
FIR
1.0225
0. 35,929
The results of Granger causality test show that the indicators of economic growth and financial development can be found. The relationship between financial development and economic growth between 1992 and 2012. It is possible to significantly reject the hypothesis that financial deepening horizontal development (FIR) and financial institution scale (FIN) are not the Granger cause of economic growth (PRGDP). However, it is not possible to reject the hypothesis that economic growth (PRGDP) is not the Granger cause of the development of financial institutions (FIN) and financial deepening (FIR). Therefore, it can be concluded that financial development, especially financial deepening, is the cause of economic growth. The expansion of the financial scale and the development of financial deepening can significantly enhance the level of economic growth, while economic growth cannot significantly promote the development of finance. The same is true of the Granger causality test between the two groups: economic growth (PRGDP) and government spending (GOV). It can be concluded that economic growth can significantly and continuously raise the level of government fiscal expenditure, while the improvement of government expenditure level has little effect on the effect of economic growth.
The test results of each equation show that the coefficient t statistic values and F statistic values of each equation coefficient in VAR (2) model are very significant at the level of confidence X (Table 4). And the determination coefficient F with the value of the fixed coefficient is also basically above 0.95, which proves that the statistical property of the model and the goodness of fitting are good. VAR (2) model stationarity test—for the unit root test results of VAR model, there are eight unit roots: 0.986022, 0.836921, 0.836921, 0.819441, 0.819441, 0.586825, 0.586825, 0.327158. The unit root test results show that all unit roots fall within the unit circle. It shows that the relationship between economic growth and financial development during the period of research during 1992–2012 have been stable for a long time, which conform to the conditions of the VAR (2) model built. Because the VAR model is a non-theoretical model, the influence of one variable on other variables is generally not analyzed when analyzing the relevant conclusions. It is analyzed that when the model is subjected to some kind of impact, it considers how the influence of the disturbance affects the dynamic impact on all variables of the system, namely the impulse response function method. Variance decomposition refers to the contribution of each structural impact to the change of endogenous variables. In order to further clarify the relationship between China’s financial development and economic growth, this paper makes impulse response function analysis and variance analysis. Since this article selects the data for the annual data analysis, results of impulse response function and variance were not significant; only the corresponding results are a simple comb, and only the effect of the shock impact is rough to observe. In the analysis of impulse response function, the impact of self-impact is not taken into account. LNPRGDP, LNFIN, and LNFIR variables will respond to the impact in the short or long term. The impact on LNGOV is very small. The difference is that LNPRGDP and LNFIN are impacted by other variables, and they show that they are first strengthened and then reduced to a stable state. The impact of LNFIR on other variables is gradually reduced to a stable state, and the impact of LNPRGDP on LNGOV shows a very insignificant change. The results of the variance analysis show that LNPRGDP is mainly affected by its own impact, which is only 25%. And the financial development index is affected by the economic growth index; the impact of the significant maximum is more than 50%. Since the selected variables are all I (1) sequences, LNPRGDP, LNFIN, LNFIR, and LNGOV may have a long-term stable co-integration relationship. Through the test results, it can be seen that at the 95% confidence level, there is no co-integration relationship, and there is at most one co-integration relationship, and there are at most two co-integration relationships. Thus, it is concluded that there are three co-integration relations in the significance level of 5%. When there are multiple co-integration relationships, the first co-integration relationship is usually chosen as the most optimal co-integration relationship between the likelihood ratio test results. It is chosen from that Eviews5.0 to provide the optimum co-integer relationship from the likelihood ratio examination:
It is written as the co-integration vector β = (1, 1.098551, 0.537613, −4.780388), which is the unit root test of the newly generated sequence E1t, which shows that it passes the ADF test and is a stable sequence. It shows that the four variables have a co-integration relationship in the sample interval.
5 Conclusion
It analyzed the relationship between financial development and economic growth of China by establishing VAR model analysis this year, especially the statistical analysis, the steadiness inspection, the cause-and-effect verification of VAR gra, the impulse response function and the analysis of variance decomposition, the correlation check, and the vector error correction model. The conclusion was drawn between the development of the financial market and financial and economic growth in China. First, the relationship between financial development and economic growth is that economic growth can promote the level of financial deepening, while the impact on the scale expansion of financial institutions is not significant. And the development of financial institutions is mainly influenced by the level of financial deepening. The promotion of financial development to economic growth mainly show that the improvement of financial deepening level can greatly promote economic growth, while the scale expansion of financial institutions is not significant. Secondly, the relationship between the economy and finance and politics is the same as the development of economy and finance. The relationship between the two is mutually reinforcing. In contrast, economic growth could significantly promote the increase of fiscal expenditure, while the impact of government expenditure on economic growth is not significant. The impulse response function shows that when the government expenditure is hit, the economic growth index will make an insignificant reaction.
Funding
The study was supported by “Shandong social science planning project (Grant No. 18BJJJ09).”
Availability of data and materials
Data sharing is not applicable to this article as no datasets were generated or analyzed during the current study.
Author’s information
AW, Doctor of Management, is a professor, graduated from Tianjin University in 2007, and worked in China University of Petroleum. His research interests include theory and practice of financial management.
Competing interests
The author declares that she has no competing interests.
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