Testing Non-linear Effect of Urbanization on Economic Growth in China — Based on the Aspect of Financial Deepening

Abstract

Smooth Transition Regression Model (STR) is applied to analyze the non-linear effect of urbanization on economic growth in this study. By collecting relevant variable data in 1978–2012, financial deepening is selected as the transition variable to construct the STR Model which could reflect the dynamic change of urbanizational economic growth effect. The result shows that urbanizational economic growth effect should present the characteristics of threshold and could be described with non-linear Smooth Transition Model (LSTR1). Meanwhile, the urbanizational economic growth effect should reveal asymmetry, in which the research findings show contemporary financial deepening (FISt) as a factor. Specifically, the linear feature appears when the FISt is lower than 0.3792 (before 1990), while it reveals non-linearity when the FISt exceeds 0.3792 (after 1990), and the non-linearity becomes the major factor in the urbanizational economic growth effect after 1990.