Financial development and economic growth in South Korea: an application of smooth transition error correction analysis

Abstract

This article investigates the influences of financial development on economic growth for South Korea. The analysis is performed using an error correction model and a nonlinear smooth transition error correction technique. Empirical results from the cointegration test reveal that there is a long-run equilibrium relationship among financial development and economic growth. We also demonstrate that the nonlinear specification is more appropriate than the linear model and confirm the presence of nonlinearity in the aggregate output. Furthermore, we find that the short-run effect of financial development on economic growth is unstable despite the positive long-term effect.