The role of capital markets in economic growth and development

Abstract

The study examines the essential role of capital markets in economic growth using a rigorous methodology based on empirical panel data analysis from 1990 to 2020, encompassing high-income, low-income, and middle-income countries.

The results demonstrate that the opening of capital markets significantly influences capital flows and economic performance. It generally stimulates inbound capital flows, thereby fostering economic growth.

Furthermore, the study highlights the close relationship between capital market development and long-term economic growth. Countries with well-developed capital markets exhibit a substantially higher annual growth rate (4.5%) compared to those with less developed markets (2.5%).

Financial policy plays a crucial role: strict regulations on capital markets lead to an average annual growth rate of 4.2%, as opposed to 2.9% with less stringent regulations.

Financial intermediation is also essential. Countries with robust banking systems experience an average annual growth rate of 4.3%, while those with weak banking systems achieve only 2.7%.

In summary, the study confirms the importance of capital markets and financial policy for long-term economic growth. It emphasizes the need for robust financial policies to promote capital market development and financial intermediation, thereby stimulating economic growth and sustainable development.