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The impact of financial development on economic growth

Author

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  • Madhu Sehrawat
  • A.K. Giri

Abstract

Purpose - The purpose of this paper is to investigate the possible co-integration and the direction of causality between financial development and economic growth in South-Asian Association for Regional Cooperation (SAARC) countries using annual data from 1994 to 2013. Design/methodology/approach - The Carrion-i-Silvestreet al.(2005) stationarity test with structural breaks is used to check the stationarity. The Westerlund (2006) panel co-integration test is employed to examine the long-run relationship among the variables. To carry out tests on the co-integrating vectors, fully modified ordinary least squares (FMOLS) and PDOLS techniques are used and panel Granger causality test is used to examine the direction of the causality. Findings - The Westerlund (2006) panel co-integration test confirms the existence of the long-run relationship between financial development and economic growth for SAARC countries. The coefficients of FMOLS and DOLS indicate that index of financial development (IFD) and trade openness supports economic growth in SAARC region. In the short-run, there is unidirectional causality running from IFD to economic growth. Research limitations/implications - In the view of these findings it is recommended that countries in the region should adopt policies geared toward financial sector development to attain high economic growth. Originality/value - To the best of the author’s knowledge, no studies have looked into SAARC countries to study the relationship between financial development and economic growth, this study is the first of its kind.

Suggested Citation

  • Madhu Sehrawat & A.K. Giri, 2016. "The impact of financial development on economic growth," International Journal of Emerging Markets, Emerald Group Publishing Limited, vol. 11(4), pages 569-583, September.
    • Handle: RePEc:eme:ijoemp:ijoem-11-2014-0172
    DOI: 10.1108/IJoEM-11-2014-0172
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    Cited by:

    1. ULLAH, nazim & Barua, Chayan & Haque, Ehsanul & Arif Hosen Raja, Md & Tahsinul Islam, Mohammed, 2024. "Nexus Between Financial System and Economic Growth: Evidence from Bangladesh," MPRA Paper 119937, University Library of Munich, Germany, revised 14 Feb 2024.

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