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Financial development and economic growth nexus: a time-series evidence from India

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  • Tarlok Singh

Abstract

This study examines the relationship between financial development and economic growth in India for the period 1951-52 to 1995-96. The long-run equilibrium and short-run dynamic models are estimated using financial interrelations ratio and new issue ratio as the measures of financial development, a la Goldsmith (1969). The Johansen (1991) estimator rejects the null of zero cointegrating vector and shows the presence of long-run equilibrium relationship between financial development and economic growth. The error correction model, impulse response and variance decomposition analyses (Sims, 1980), and the Toda and Yamamoto (1995) estimator show the presence of bidirectional Granger-causality between financial development and economic growth. The presence of bidirectional Granger-causality suggested by these estimators points towards the possible problem of endogeneity and simultaneity bias in the growth models that examine the contemporaneous effect of financial development on economic growth. The economic reforms that started since July 1991 emphasized on the liberalization and development of financial sector to supplement the efforts aimed at achieving high economic growth in India.

Suggested Citation

  • Tarlok Singh, 2008. "Financial development and economic growth nexus: a time-series evidence from India," Applied Economics, Taylor & Francis Journals, vol. 40(12), pages 1615-1627.
    • Handle: RePEc:taf:applec:v:40:y:2008:i:12:p:1615-1627
    DOI: 10.1080/00036840600892886
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    1. Wojciech W. Charemza & Derek F. Deadman, 1992. "New Directions In Econometric Practice," Books, Edward Elgar Publishing, number 84.
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