Financial development and economic growth in Singapore: demand-following or supply-leading?

Abstract

Two competing hypotheses regarding financial development and economic growth are empirically investigated, in the context of supply-leading and demand-following finance. The focus is on Singapore as a country which has implemented financial restructuring strategies that, arguably, amount to a ‘supply-leading finance’ experiment. By drawing on some developments in economic theory over the last three decades, hypotheses are formulated within a statistical framework, namely a bivariate vector autoregressive (BVAR) model. A battery of econometric techniques are applied to test for stationarity, cointegration, exogeneity and Granger-causality. The evidence largely supports the supply-leading hypothesis only when broad monetary aggregates and a monetization variable are used as surrogates for financial development. It is concluded that there is a plausible case for those economies which intend to adopt a financial restructuring strategy driven by a supply-leading policy stance that involves enhanced monetization of the economy and bank intermediation.