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Finance growth nexus across Indian states: evidences from panel cointegration and causality tests

Author

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  • Rajesh Sharma

    (Indian Institute of Technology Ropar)

  • Samaresh Bardhan

    () (Indian Institute of Technology Ropar)

Abstract

Abstract The paper deals with finance-growth relationship across Indian states over 1980–2011 in panel cointegration and causality framework. We apply Engle–Granger two-step procedure for cointegration test in panel setting which takes care of cross-sectional dependence and heterogeneity across states. For panel Granger causality analysis, we employ Dumitrescu and Hurlin (Econ Model 29:1450–1460, 2012) method and apply bootstrapping to account for cross-sectional dependence. We find robust evidence of cointegration between per capita income and credit per capita. Using panel FMOLS, we find that 1 % change in credit per capita results in 0.14 % change in per capita income. Panel Granger causality test reveals that there is bi-directional causality (feedback effects) in the absence of cross-sectional dependence. However, with cross-sectional dependence, we find evidence in favour of supply leading hypothesis. Probable policy implication calls for inclusive financial development and growth strategies in order to mitigate uneven income levels across states.

Suggested Citation

  • Rajesh Sharma & Samaresh Bardhan, 2017. "Finance growth nexus across Indian states: evidences from panel cointegration and causality tests," Economic Change and Restructuring, Springer, vol. 50(1), pages 1-20, February.
  • Handle: RePEc:kap:ecopln:v:50:y:2017:i:1:d:10.1007_s10644-015-9178-2
    DOI: 10.1007/s10644-015-9178-2
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    References listed on IDEAS

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    Keywords

    Finance-growth nexus; Panel unit root test; Cross-sectional dependence; Panel Granger no-causality test;

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General
    • C10 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - General

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