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

Author

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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.

Suggested Citation

  • Md abdul Wadud, 2009. "Financial development and economic growth: a cointegration and error-correction modeling approach for south Asian countries," Economics Bulletin, AccessEcon, vol. 29(3), pages 1670-1677.
    • Handle: RePEc:ebl:ecbull:eb-09-00283
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    References listed on IDEAS

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    2. Bazán, Walter, 2011. "No-linealidades y asimetrías en el crédito peruano," Working Papers 2011-015, Banco Central de Reserva del Perú.
    3. Aqil Khan & Mumtaz Ahmed & Salma Bibi, 2019. "Financial development and economic growth nexus for Pakistan: a revisit using maximum entropy bootstrap approach," Empirical Economics, Springer, vol. 57(4), pages 1157-1169, October.
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    7. Md. Qamruzzaman & Wei Jianguo, 2017. "Financial innovation and economic growth in Bangladesh," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 3(1), pages 1-24, December.
    8. Md. Qamruzzaman & Wei Jianguo, 2018. "Nexus between financial innovation and economic growth in South Asia: evidence from ARDL and nonlinear ARDL approaches," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 4(1), pages 1-19, December.
    9. Bilal Mehmood & Parvez Azim & Syed Hassan Raza, 2015. "Reconsidering the Finance-Growth Nexus in Asian Countries: A Panel ARDL Approach," International Journal of Economics and Empirical Research (IJEER), The Economics and Social Development Organization (TESDO), vol. 3(1), pages 1-5, January.
    10. Muhammad Halilintar, 2018. "Cooperatives and Economic Growth in Indonesia," European Research Studies Journal, European Research Studies Journal, vol. 0(2), pages 611-622.
    11. IWASAKI, Ichiro & ONO, Shigeki, 2023. "Economic Development and the Finance-Growth Nexus : A Meta-Analytic Approach," CEI Working Paper Series 2023-06, Center for Economic Institutions, Institute of Economic Research, Hitotsubashi University.
    12. 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.
    13. Michael ADUSEI, 2013. "Exploring the Moderating Effect of Entrepreneurial Activity on the Finance-Growth Nexus in Africa?," Asian Journal of Empirical Research, Asian Economic and Social Society, vol. 3(8), pages 990-1004, August.
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    15. 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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    More about this item

    Keywords

    Financial Development; Economic Growth; Cointegrated Vector Autoregressive Model; South Asian Countries.;
    All these keywords.

    JEL classification:

    • C3 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables
    • E0 - Macroeconomics and Monetary Economics - - General

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