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Financial development and economic growth: a cointegration and error-correction modeling approach for south Asian countries

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  • Md abdul Wadud

    ()
    (Department of Economics, Rajshahi University)

Abstract

This paper assesses long-run causal relationship between financial development and economic growth for South Asian countries - India, Pakistan and Bangladesh for the period 1976 -2008. Financial development emanates from financial systems that encourage financial stability and foster a framework for the implementation of successful economic polices. Financial Systems can be divided into ‘bank-based'' and ‘capital-market-based'' categories. Bank-based financial systems are the close involvement of their banks with industrial firms; banks are the most important source of finance for industry. Capital-market-based financial systems are characterized by highly developed capital markets and banks. Bank-based financial systems may be in a good position to implement successfully expansionary monetary policy and industrial strategy. Financial liberalisation and repression may show a positive association between financial development and economic growth. We conduct cointegrated vector autoregressive model to assess long-run relationship between financial development and economic growth. Empirical results imply a stable relationship between financial development and economic growth for these countries. Results of error correction models indicate Granger causality between financial development and economic growth running from financial development to economic growth.

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Bibliographic Info

Article provided by AccessEcon in its journal Economics Bulletin.

Volume (Year): 29 (2009)
Issue (Month): 3 ()
Pages: 1670-1677

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Handle: RePEc:ebl:ecbull:eb-09-00283

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Related research

Keywords: Financial Development; Economic Growth; Cointegrated Vector Autoregressive Model; South Asian Countries.;

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References

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  1. King, Robert G. & Levine, Ross, 1993. "Finance and growth : Schumpeter might be right," Policy Research Working Paper Series 1083, The World Bank.
  2. King, Robert G. & Levine, Ross, 1993. "Finance and growth : Schumpeter might be right," Policy Research Working Paper Series 1083, The World Bank.
  3. Pablo Emilio Guidotti & Jose De Gregorio, 1992. "Financial Development and Economic Growth," IMF Working Papers 92/101, International Monetary Fund.
  4. Johansen, Soren, 1995. "Likelihood-Based Inference in Cointegrated Vector Autoregressive Models," OUP Catalogue, Oxford University Press, number 9780198774501, September.
  5. Harb, Nasri & Al-Awad, Mouawiya, 2005. "Financial Development and Economic Growth in the Middle East," MPRA Paper 13605, University Library of Munich, Germany.
  6. Johansen, Soren & Juselius, Katarina, 1990. "Maximum Likelihood Estimation and Inference on Cointegration--With Applications to the Demand for Money," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 52(2), pages 169-210, May.
  7. Deren Unalmis, 2002. "The Causality Between Financial Development and Economic Growth : The Case of Turkey," Working Papers 0203, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
  8. Philip Arestis & Panicos Demetriades, . "Finance and growth: Institutional Considerations and Causality," Working Papers 9605, University of East London, Department of Economics.
  9. A. Galetovic, 1996. "Finance and growth: a synthesis and interpretation of the evidence," Banca Nazionale del Lavoro Quarterly Review, Banca Nazionale del Lavoro, vol. 49(196), pages 59-82.
  10. OZTURK, Ilhan, 2008. "Financial Development And Economic Growth: Evidence From Turkey," Applied Econometrics and International Development, Euro-American Association of Economic Development, vol. 8(1), pages 85-98.
  11. A. Galetovic, 1996. "Finance and growth: a synthesis and interpretation of the evidence," BNL Quarterly Review, Banca Nazionale del Lavoro, vol. 49(196), pages 59-82.
  12. Johansen, Søren & Juselius, Katarina, 1992. "Testing structural hypotheses in a multivariate cointegration analysis of the PPP and the UIP for UK," Journal of Econometrics, Elsevier, vol. 53(1-3), pages 211-244.
  13. Johansen, Soren, 1991. "Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models," Econometrica, Econometric Society, vol. 59(6), pages 1551-80, November.
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Cited by:
  1. Bazán, Walter, 2011. "No-linealidades y asimetrías en el crédito peruano," Working Papers 2011-015, Banco Central de Reserva del Perú.
  2. repec:ebl:ecbull:v:30:y:2010:i:1:p:624-635 is not listed on IDEAS
  3. Caroline Duburcq & Eric Girardin, 2010. "Domestic and external factors in interest rate determination: the minor role of the exchange rate regime," Economics Bulletin, AccessEcon, vol. 30(1), pages 624-635.
  4. repec:asi:ajoerj:2013:p:752-762 is not listed on IDEAS
  5. Michael Adusei, 2013. "Finance-Growth Nexus in Africa: A Panel Generalized Method of Moments (GMM) Analysis," Asian Economic and Financial Review, Asian Economic and Social Society, vol. 3(10), pages 1314-1324, October.
  6. ABOUDOU Maman Tachiwou, 2009. "Causality tests between stock market development and economic growth in West African Monetary Union," Economia. Seria Management, Faculty of Management, Academy of Economic Studies, Bucharest, Romania, vol. 12(2), pages 14-27, December.

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