Financial Market’s Contribution to Economic Growth in Romania

Modern economies are characterized, among other things, by developed financial sectors. This reality has stimulated scientific research on identifying correlations between the level of financial market development and economic growth, especially for emerging countries. Romania is an interesting case to question the correlation between financial markets and economic growth, as it recently acquired the status of a functioning market economy and joined the complex of high economic development given by the EU. Using VECM modelling, as well as Wald and Granger causality tests, this paper analyses the nature and direction of causal relationships between the real economy and the financial sector in Romania, both on the short and long run. This paper is based on the Anglo-Saxon approach of the financial market, according to which it includes money market and capital market, and our econometric analysis takes into account both monetary and capital market components, in identifying correlations with the real economy. The results show that on the long run, between real GDP and credit to the private sector there is a one-way relationship, namely real GDP influences credit, but not vice versa. Also, on the long run, there is no correlation between market capitalization and real GDP. However, on the short run, there is a unidirectional causality from credit to real GDP, and also from real GDP to market capitalization. The results of the econometric analysis show that, in Romania, the financing function is met almost entirely by the banking system, while the capital market is small and does not fulfil yet the function of financing the real economy. Despite these empirical evidences, the author considers that the development of capital market is a sine qua non condition for modernizing the Romanian economy, by increasing funding potential and enhancing competition in the financial market. The author claims the need for government support and recommends economic policy measures in order to accelerate financial market`s expansion in the Romanian economy