Financial market development and economic growth in Hong Kong: a Post-Keynesian approach

Abstract

[Extract] Recent years have witnessed an increasing interest in the role of the financial sector in economic development. In the aftermath of the financial crises of 1997–98, it is becoming increasingly clear that a sound understanding of the interaction between financial markets and real sector is essential for economic growth and long-term prosperity. This clearly calls for further research on this important issue.

The objective of this study is to examine the role of financial market development in producing a virtuous circle of high aggregate demand in Hong Kong. In this study, first, we develop a long run macroeconomic framework, following Onaran and Stockhammer (2003), which is a dynamic Post Keynesian and open economy model. Second, we account for economic theory by developing structural VAR format.

The empirical analysis of this study provides insights into the functioning of the Hong Kong macroeconomy, and by investigating the dynamic responses of the model to shocks in indicators of financial development and determining whether the effects of such shocks on the long run relations disappear.