Abstract:
The study aimed to investigate the relationship between stock market development and economic growth of the high income countries and middle income countries. Panel data has been used in study for the period of 1995 to 2015. Gross domestic product is taken as the dependent variable whereas the independent variables of the study include stock market capitalization, trade openness, foreign direct investment, inflation and financial depth. The countries taken into study from high income level include France, Germany, Japan, Spain, United States, Singapore, Switzerland, Poland, Australia and Chile. Whereas middle level income countries utilized in the study are Indonesia, Philippines, Turkey, Thailand, Malaysia, Mauritius, Mexico, Argentina, South Africa and Peru from World development indicators. The results of the study after applying fixed effect regression model under Hausman specification test indicated that for both high income and middle income countries stock market development and economic growth has significant positive relation. Although for high income economies inflation, trade openness and foreign direct investment hold significant positive relationship with economic growth. Whereas financial depth has negative yet significant impact on economic growth. On the other hand for middle income countries, foreign direct investment has significant positive relation but inflation and financial depth has significant negative relationship with economic growth. Trade openness has been found to have negative insignificant impact on economic growth in middle income countries. On the basis of empirical results it is suggested that the policy makers need to formulate effective and prudent policy in order to expand stock markets in high income and middle income economies.
