Stock market and growth in Greece: evidence from cointegration and causality tests

Abstract

Current wisdom suggests that stock-market development may affect economic growth by raising the
proportion of savings funnelled to investment and/or increasing the social marginal productivity of
capital and/or influencing the saving rate. Earlier empirical studies on the subject, however, have
reported conflicting research findings, attributable to the use of cross-sectional data and differences in the
samples chosen, time periods examined and data bases used. Moreover, the evidence suggests that the
causal link between finance and growth is crucially determined by the nature and operation of the
financial institutions and policies pursued in each country. These considerations point to the need for case
specific studies using time-series data for individual countries. In this context, the present study seeks to
contribute to current research in the area by investigating the relationship between economic growth and
stock-market activity in the case of Greece over the period 1958-95. To this end, an endogenous growth
model is specified providing a formal rationalization for the incorporation of stock-market activity in a
sources — of — growth equation. Using cointegration and causality tests, the paper reports findings that
provide empirical support to the hypothesis that stock-market development does not affect positively the
output growth rate in Greece.