Stock market development and economic growth: the case of the Republic of Serbia

Abstract

© 2020, © 2020 Informa UK Limited, trading as Taylor & Francis Group. This paper examines the relationship between stock market development and economic growth in the Republic of Serbia in the period 2002Q1-2018Q4. In order to incorporate the important aspects of stock market development, the market capitalisation ratio is used as the indicator of the size, the total value ratio and the turnover ratio as the liquidity indicators, while the growth rate of the real GDP is used as the indicator of economic growth. The analysis is carried out within the Vector Autoregressive model, using the Toda-Yamamoto-Dolado-Lütkepohl approach to the Granger causality test, the impulse response function, and forecast error variance decomposition. This study reveals the unidirectional Granger causality, running from stock market development to economic growth. The impulse response function shows the positive response of economic growth to an unexpected stock market shock size, while liquidity shocks lead to alternate positive and negative responses to the economic growth rate in the short term. The variance decomposition analysis indicates that fluctuations in the economic growth rate are largely explained by the shocks of the market capitalisation ratio. From the findings, it is concluded that policy-makers should focus on a stock market promotion strategy to enhance economic growth in the Republic of Serbia.