The historical relation between banking, insurance and economic

Abstract

We examine empirically the dynamic historical relation between banking, insurance economic (income) growth in Sweden using time-series data from 1830 to 1998. We examine long-run historical trends in the data using econometric tests for cointegration and Granger causality. Our results indicate that the development of domestic banking, but not insurance, preceded economic growth in Sweden during the nineteenth century, while Granger causality was reversed in the twentieth century. We also find that the development of bank lending in the nineteenth century increased the demand for insurance as well as promoting economic growth. In later periods, the development of insurance fosters demand for banking services but only in times of economic prosperity. For the entire period of our analysis, we find that banking is the predominant influence on both economic growth and the demand for insurance. In contrast, the insurance market appears to be driven more by the pace of growth in the economy rather than leading economic development. Therefore, we conclude that financial intermediation, particularly banking, is an important prerequisite for stimulating economic growth and argue that our results could have important policy implications for contemporary emerging economies that are developing their financial and legal infrastructures.