RELATIONSHIP BETWEEN THE STOCK MARKET DEVELOPMENT, BANKING SECTOR DEVELOPMENT AND ECONOMIC GROWTH IN THE CEE COUNTRIES

Abstract

The stock markets of most CEE countries have been actively developing and improving over the past decades but they still do not belong to the developed markets according to MSCI classification, the financial systems of these countries tends towards the bank-oriented type. Does the level of stock market development affect economic growth in CEE countries and do these countries need to develop their stock markets accordingly? The purpose of this article is to identify the direction of the causal link between stock market development, banking sector development and economic growth in Central and Eastern European (CEE) countries. The subject of the research is the relationship between the stock market development, banking sector development and economic growth in the CEE countries. Methodology. The research is based on the annual data for two time periods 1999-2012 and 1999-2015 for the 8 and 5 CEE countries, respectively. The study is based on the Granger causality test and linear regression models. According to results of the research the stock market development plays an important role in attracting foreign direct investment and economic growth in CEE countries in the long-run period. There are revealed the channels of indirect influence of the stock market capitalization on the economic growth. Stock market capitalization has impact on the banking sector and gross capital formation, which in turn have impact on the economic growth of CEE countries. There is the impact of both the stock market and the banking sector development on the economic growth in CEE countries during 1999-2015. However, the impact of the stock market size on the economic growth is positive and the impact of domestic credit to private sector is negative. Practical implications. The study proves the reasonable need for the CEE countries to move towards further development of the stock market, improving the market infrastructure and institutional environment in order to expand the size of the stock market and thereby contribute to the economic growth of this countries. Value/originality. The obtained conclusion about the role of the stock market in economic growth and attraction of FDI is of great importance both for Ukraine and other countries with similar trajectory of economic development in general and similar historical aspects of the origin of stock markets in particular and should be taken into account by state leaders when making decisions on the need to create conditions for development of such element of the country’s financial system as the stock market.