The nexus between stock market development and economic growth.

Abstract

The study investigated the relationship between stock market development and economic growth in Belgium using ARDL approach with annual time series data from 1988 to 2012. Real GDP per capita was used as a proxy for economic growth and stock market capitalization as a ratio of GDP as an approximate measure of stock market development. The relationship between stock market development and economic growth falls into four categories which are (1) stock market-led economic growth, (2) economic growth-led stock market development, (3) feedback effect and (4) neutrality hypothesis where the relationship between the two variables does not exist. Despite the existence of these four views on the relationship between stock market and economic growth, it appears from the literature review done by the author that majority of the empirical evidence support the stock market-led economic growth view. The fact that the topic on the directional causality between stock market and economic growth is still inconclusive is the major motivating factor why the author chose to investigate the relationship between the two variables in Belgium. The study observed that there exist an insignificant long run causality running from stock market development towards economic growth in Belgium. This relationship was not detected in the short run. Moreover, the reverse causality from real GDP per capita to stock market capitalization both in the long and short run was not detected in Belgium. These results are at variance with the majority of the empirical findings reviewed earlier on. It could possibly be that certain conditions that are necessary to enable stock market to significantly positively influence economic growth were not in place in Belgium. Therefore, the study urges the Belgium authorities to put in place the right environment, policies and programmes that enable the stock market to play its role of stimulating economic growth.