IDEAS home Printed from https://ideas.repec.org/a/nrb/journl/v32y2020i2p29.html
   My bibliography  Save this article

Causality between Financial Development and Economic Growth in Nepal

Author

Listed:
  • Rajendra Maharjan

Abstract

This study examines the empirical relationship between financial development and economic growth in Nepal. Financial development has been measured by three key pillars of the financial system bank, capital market and insurance. Gross domestic product and gross fixed capital formation are considered for economic growth indicators. Using time series techniques, the stationary properties of the data sets are tested followed by Johansen co-integration test to observe long run equilibrium relationship between the two variables and Granger Causality test to identify the causal relationship among the variables. Also, Vector Error Correction Model (VECM) has been employed to analyze the short run dynamics of the system. The result of the study reveals that there is cointegrating relationship between market capitalization and economic development with short-run causality is running from market capitalization to GDP. In regard to insurance market, error correction term is negative and significance for both GDP and GCF indicating there is cointegrating relationship between insurance market and economic development. However, the result shows no evidence of causality between insurance premium and economic development in short-run. The negative relation between bank and GDP reinforces that there is a cointegrating relationship between banking sector development and economic development. The result also shows that lagged value of GDP is significant. It shows that short-run causality is running from GDP to banking sector development.

Suggested Citation

  • Rajendra Maharjan, 2020. "Causality between Financial Development and Economic Growth in Nepal," NRB Economic Review, Nepal Rastra Bank, Economic Research Department, vol. 32(2), pages 29-44, October.
    • Handle: RePEc:nrb:journl:v:32:y:2020:i:2:p:29
    as

    Download full text from publisher

    File URL: https://www.nrb.org.np/contents/uploads/2020/12/2.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Robert M. Solow, 1956. "A Contribution to the Theory of Economic Growth," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 70(1), pages 65-94.
    2. Graff, Michael, 1999. "Financial development and economic growth: A new empirical analysis," Dresden Discussion Paper Series in Economics 05/99, Technische Universität Dresden, Faculty of Business and Economics, Department of Economics.
    3. Vipin Ghildiyal & A.K Pokhriyal & A.K Pokhriyal & Arvind Mohan, 2015. "Impact of Financial Deepening on Economic Growth in Indian Perspective: ARDL Bound Testing Approach to Cointegration," Asian Development Policy Review, Asian Economic and Social Society, vol. 3(3), pages 49-60.
    4. Mosab I. Tabash, 2018. "Islamic financial investments and economic growth evidence from emerging economy, United Arab Emirates," International Journal of Economics and Business Research, Inderscience Enterprises Ltd, vol. 15(1), pages 125-139.
    5. Vipin Ghildiyal & A.K. Pokhriyal & Arvind Mohan, 2015. "Impact of Financial Deepening on Economic Growth in Indian Perspective: ARDL Bound Testing Approach to Cointegration," Asian Development Policy Review, Asian Economic and Social Society, vol. 3(3), pages 49-60, September.
    6. Yilmaz Bayar & Abdulkadir Kaya & Murat Yildirim, 2014. "Effects of Stock Market Development on Economic Growth: Evidence from Turkey," International Journal of Financial Research, International Journal of Financial Research, Sciedu Press, vol. 5(1), pages 93-100, January.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Sheilla Nyasha & Nicholas M. Odhiambo, 2018. "Finance-Growth Nexus Revisited: Empirical Evidence from Six Countries," Scientific Annals of Economics and Business (continues Analele Stiintifice), Alexandru Ioan Cuza University, Faculty of Economics and Business Administration, vol. 65(3), pages 247-268, September.
    2. Ademola Obafemi Young, 2019. "Growth Impacts of Income Inequality: Empirical Evidence From Nigeria," Research in World Economy, Research in World Economy, Sciedu Press, vol. 10(3), pages 226-262, December.
    3. Babatunde Wasiu ADEOYE & Ojo Samson ISUMAILA, 2022. "Stock Market Liquidity And Economic Growth: Empirical Evidence From Nigeria," Romanian Journal of Economics, Institute of National Economy, vol. 54(1(63)), pages 80-94, June.
    4. Gulshan Kumar & Shallu Batra, 2023. "Interrelationship Between Human Development, Financial Development and Economic Growth: Empirical Evidences from Indian Economy," Indian Journal of Human Development, , vol. 17(1), pages 60-81, April.
    5. Nyasha, Sheilla & Odhiambo, Nicholas M., 2016. "Financial intermediaries, capital markets, and economic growth: empirical evidence from six countries," Working Papers 19908, University of South Africa, Department of Economics.
    6. Nyasha, Sheilla & Gwenhure, Yvonne & Odhiambo, Nicholas M., 2017. "The Dynamic Causal Linkage Between Financial Development And Economic Growth: Empirical Evidence From Ethiopia," Economia Internazionale / International Economics, Camera di Commercio Industria Artigianato Agricoltura di Genova, vol. 70(1), pages 73-102.
    7. Manuel Ennes Ferreira & Jelson Serafim & João Dias, 2022. "Finance-Growth Nexus: Evidence from Angola," Working Papers REM 2022/0227, ISEG - Lisbon School of Economics and Management, REM, Universidade de Lisboa.
    8. Mai, Nhat Chi, 2019. "Stock Market And Economic Growth In Vietnam," OSF Preprints de8zq, Center for Open Science.
    9. , Aisdl, 2019. "Stock Market And Economic Growth In Vietnam," OSF Preprints ucbhp, Center for Open Science.
    10. Gbenga F. BABARINDE, 2020. "Growth Effects Of Foreign Direct Investment And Financial Deepening In Nigeria (1981-2018)," Business Excellence and Management, Faculty of Management, Academy of Economic Studies, Bucharest, Romania, vol. 10(4), pages 49-67, December.
    11. Mesut Alper GEZER, 2018. "The relationship between financial deepening and economic growth: Bootstrap causality approach for the selected upper middle income countries," Theoretical and Applied Economics, Asociatia Generala a Economistilor din Romania - AGER, vol. 0(1(614), S), pages 95-112, Spring.
    12. Rao, B. Bhaskara, 2010. "Estimates of the steady state growth rates for selected Asian countries with an extended Solow model," Economic Modelling, Elsevier, vol. 27(1), pages 46-53, January.
    13. Prof. Dr. Adem KALCA & Resc. Assist. Atakan DURMAZ, 2012. "Diaspora As The Instrument Of Humane Capital," International Journal of Business and Social Research, LAR Center Press, vol. 2(5), pages 94-104, October.
    14. Burda, Michael C. & Zessner-Spitzenberg, Leopold, 2024. "Greenhouse Gas Mitigation and Price-Driven Growth in a Solow-Swan Economy with an Environmental Limit," IZA Discussion Papers 16771, Institute of Labor Economics (IZA).
    15. João Juchem Neto & Julio Claeyssen, 2015. "Capital-induced labor migration in a spatial Solow model," Journal of Economics, Springer, vol. 115(1), pages 25-47, May.
    16. Erich Gundlach, 2003. "Growth Effects of EU Membership: The Case of East Germany," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 30(3), pages 237-270, September.
    17. Hajer Habib, 2023. "Remittances and Labor Supply: Evidence from Tunisia," Journal of the Knowledge Economy, Springer;Portland International Center for Management of Engineering and Technology (PICMET), vol. 14(2), pages 1870-1899, June.
    18. Boucekkine, Raouf & del Rio, Fernando & Licandro, Omar, 2005. "Obsolescence and modernization in the growth process," Journal of Development Economics, Elsevier, vol. 77(1), pages 153-171, June.
    19. Ottaviano, Gianmarco & Peri, Giovanni, 2008. "Immigration and National Wages: Clarifying the Theory and the Empirics," CEPR Discussion Papers 6916, C.E.P.R. Discussion Papers.
    20. Kawalec Paweł, 2020. "The dynamics of theories of economic growth: An impact of Unified Growth Theory," Economics and Business Review, Sciendo, vol. 6(2), pages 19-44, June.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:nrb:journl:v:32:y:2020:i:2:p:29. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Publication Division NRB (email available below). General contact details of provider: https://edirc.repec.org/data/nrbgvnp.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.