Financial Sector Development, Economic Growth and Stability

My dissertation investigates financial sector development, economic growth and stability through the analysis of Chinese and international evidence. My first chapter is the introduction. The second chapter investigates the effects of Chinese financial and fiscal policies on the Chinese economic recovery in the 2008 economic stimulus Plan, covering the period from the Great Recession to 2014. This chapter explores the effects of the increase in bank credit growth with significant strain of banking health on firm-level output, employment and investment. The results demonstrate that the increase in government expenditure due to the fiscal policies has the significant effects on the very same firm-level indicators. The effects of such policies are shown to depend on firm characteristics such as size, liability ratio, profitability, ownership and industry. Regarding the dynamic effects of the policies, it is documented that the roles of Chinese financial and fiscal policies are effective but temporary on the Chinese economic recovery within about 2 years. In the third chapter, I investigate the effects of financial sector development on the growth volatility by using the data of 50 countries. The empirical results show that the aggregate growth volatility declines from 1997 to 2014 in the global perspective while the advanced countries have much smaller growth volatility than the developing countries. Using the dynamic panel threshold model, I find that financial sector development significantly reduces growth volatility, especially in its lower regime. Financial sector development magnifies the shock of inflation volatility towards growth volatility in its higher regime. My results reveal the importance of keeping financial sector development at an optimal level, which is beneficial to reduce aggregate fluctuations and dampen the inflation shocks. The fourth chapter examines the asymmetric roles of bank credit on the business cycle by using international evidence. The empirical results present that bank credit is pro-cyclical and amplifies the business cycle. This effect is larger in the economic peak and trough, which forms a U-shaped curve. The U-shaped influences are robust for alternative financial factors, including M2 supply and stock price. This paper contributes to explore the distinct roles of bank credit on the economy in different business cycle phases