Financial development and productivity growth

Abstract

The propose of this paper is to test the relationship between financial development and productivity growth in 30 Chinese provinces from 2005 to 2013. Financial development is essential for economies’ economic growth when productivity growth is a crucial indicator of economic growth. To estimate the productivity of provinces, 2SLS and IV are applied to calculate the provincial TFP. Three independent variables (Credit, Deposit, Saving) that are the traditional indicators of financial development are used. The result implies that the credit Index has a strong correlation with productivity growth, while the other two have a negative relationship. Serval policies are suggested. First, keeping and enlarging the size of financial intermediation is essential. Attracting financial investment and financial institutions is crucial for expanding the size of financial intermediation. Second, Policies encourage households to invest instead of saving should be applied. More researches on the depth of financial intermediation are required.