Does the stock market cause economic growth? Portuguese evidence of economic regime change

March 7, 2018

This research tests the relation between stock market and economic growth for Portugal using data from 1993 to 2011. Because Portugal is a small open economy traditionally dependent on bank financing, we also consider the relation between bank financing and economic growth. The empirical approach focuses on the study of the relation between stock market and bank financing with economic growth in Portugal, but also identifies structural changes on these relations during the period of study. The physical replacement of the currency, as a consequence of the integration in the European Monetary Union, proves to be a significant structural change as is the effect of the subprime crisis. We find evidence consistent with a positive impact of stock market development on economic growth as well as with the converse relation. In contrast, we do not find evidence that bank financing leads to economic growth, though there is evidence that economic growth leads to increased bank financing.

Click here to go to the paper by Luís Miguel Marques, José Alberto Fuinhas, António Cardoso Marques.__