Financial Development and GDP Volatility in China

This paper tests the relationship between financial development and GDP volatility using Chinese data for the period 1977-2006. Our findings in this study suggest that a higher financial development reduces the volatility of real per capita GDP. The Autoregressive Distributed Lag (ARDL) technique to cointegration is employed to establish the existence of a long run relationship between financial developments and standard deviation of GDP - a measure of GDP volatility. In addition, this research draws some policy implications for further development of the financial sectors for economic stability and sustainable growth in China.