A maximum entropy bootstrap approach to financial development and economic growth in China

Motivated by China’s rising global economic prominence, which impacts many regional and global development issues, and the unsettled relationship between financial development and economic growth, this study uses data from 1980 to 2019 to re-examine the nexus between economic growth and financial development in this country. This study distinguishes itself from existing literature by using the maximum entropy bootstrap inference method, examining multiple dimensions of financial development and economic growth, and accounting for structural breaks. The first finding reveals a unidirectional Granger-causal relationship from aggregate economic growth to financial development. This causality is observed to mainly go towards the depth and access of financial markets and the depth of financial institutions. The second indicates that bidirectional Granger-causal relationships exist between financial development with exports and imports. The third reveals that structural breaks exhibit varying levels of statistical significance in the relationship between financial development and economic growth. These findings suggest that policymakers need to further deepen and broaden capital markets to strengthen financial development and economic growth linkages.