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Are Financial Deepening and Economic Growth Causally Related? Another Look at the Evidence

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  • Alif Darrat
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    Abstract

    This study investigates empirically the role of financial deepening in economic growth in three middle-eastern countries (Saudi Arabia, Turkey, and the United Arab emirates). Unlike many previous studies, I focus on the causal link between the degree of financial deepening and economic growth in order to discriminate between several alternative theoretical hypotheses. To that end, I use multivariate Granger-causality tests within an error-correction framework. The results generally support the view that financial deepening is a necessary causal factor of economic growth, although the strength of the evidence varies across countries and across the proxies used to measure financial deepening. The causal relationships are also predominately long-term in nature. Therefore, government policies aimed at promoting financial deepening in these countries must be persistent and sustainable in order to foster economic development. [E44, O11, O16]

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    Bibliographic Info

    Article provided by Taylor & Francis Journals in its journal International Economic Journal.

    Volume (Year): 13 (1999)
    Issue (Month): 3 ()
    Pages: 19-35

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    Handle: RePEc:taf:intecj:v:13:y:1999:i:3:p:19-35

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    Cited by:
    1. Abu-Bader, Suleiman & Abu-Qarn, Aamer, 2006. "Financial Developent and Economic Growth Nexus: Time Series Evidence from Middle Eastern and North African Countries," MPRA Paper 972, University Library of Munich, Germany.
    2. Asongu Simplice, 2012. "Linkages between Investment Flows and Financial Development: Causality Evidence from Selected African Countries," Working Papers 12/029, African Governance and Development Institute..
    3. Uğur Soytas & Engin Kucukkaya, 2011. "Economic growth and financial development in Turkey: new evidence," Applied Economics Letters, Taylor & Francis Journals, vol. 18(6), pages 595-600.
    4. Darrat, Ali F. & Al-Sowaidi, Saif S., 2009. "Financial progress and the stability of long-run money demand: Implications for the conduct of monetary policy in emerging economies," Review of Financial Economics, Elsevier, vol. 18(3), pages 124-131, August.
    5. Muhammad Arshad Khan & Abdul Qayyum, 2006. "Trade Liberalisation, Financial Sector Reforms, and Growth," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 45(4), pages 711-731.
    6. Omid Ranjbar & Zahra (Mila) Elmi & Hamid Reza Jahany, 2009. "Which is Leader in MENA region? Economic growth or financial development," Iranian Economic Review, Economics faculty of Tehran university, vol. 14(1), pages 131-153, spring.
    7. Tronzano, Marco, 2011. "“Finance and Growth: A Reassessment of the Empirical Evidence for the Indian Economy” - Finanza e crescita: un riesame dell’evidenza empirica nel caso dell’India," Economia Internazionale / International Economics, Camera di Commercio di Genova, vol. 64(3), pages 329-364.
    8. Odhiambo, Nicholas M., 2009. "Finance-growth-poverty nexus in South Africa: A dynamic causality linkage," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 38(2), pages 320-325, March.
    9. Majumder, Md. Alauddin & Eff, E. Anthon, 2012. "The link between economic growth and financial development: Evidence from districts of Bangladesh," MPRA Paper 44122, University Library of Munich, Germany.
    10. Christopoulos, Dimitris K. & Tsionas, Efthymios G., 2004. "Financial development and economic growth: evidence from panel unit root and cointegration tests," Journal of Development Economics, Elsevier, vol. 73(1), pages 55-74, February.
    11. Colombage, Sisira R.N., 2009. "Financial markets and economic performances: Empirical evidence from five industrialized economies," Research in International Business and Finance, Elsevier, vol. 23(3), pages 339-348, September.
    12. Khalifa Al-Yousif, Yousif, 2002. "Financial development and economic growth: Another look at the evidence from developing countries," Review of Financial Economics, Elsevier, vol. 11(2), pages 131-150.
    13. K A El-Wassal, 2005. "Stock Market Growth: An analysis of cointegration and causality," Economic Issues Journal Articles, Economic Issues, vol. 10(1), pages 37-58, March.
    14. Bassam AbuAl-Foul & Ismail Genc & Musa Darayseh, . "On the Causal Link between Financial Development and Economic Growth: Case of Jordan," Economics Working Papers 18-04/2014, School of Business Administration, American University of Sharjah.
    15. Odhiambo, Nicholas M., 2008. "Financial depth, savings and economic growth in Kenya: A dynamic causal linkage," Economic Modelling, Elsevier, vol. 25(4), pages 704-713, July.
    16. Oludele Akinboade & Emilie Kinfack, 2014. "Financial Sector Development Indicators and Economic Growth in Cameroon and South Africa," Social Indicators Research, Springer, vol. 115(2), pages 813-836, January.
    17. Monal Abdel-Baki, 2011. "The efficacy of the Egyptian bank reform plan in mitigating the impact of the global financial crisis," Economic Change and Restructuring, Springer, vol. 44(3), pages 221-241, August.
    18. ince, meltem, 2011. "Financial liberalization, financial development and economic growth: An empirical analysis for Turkey," MPRA Paper 31978, University Library of Munich, Germany, revised 05 May 2011.

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