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The multivariate dynamic causal relations between financial depth, inflation, and economic growth

Author

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  • Rudra P. Pradhan

    (Indian Institute of Technology)

  • Yasuyuki Nishigaki

    (Ryukoku University)

  • John H. Hall

    (University of Pretoria)

Abstract

This paper examines the dynamic causal relationship between financial depth, inflation and economic growth in India and Pakistan using an autoregressive distributive lag bounds testing procedure and vector error correction modeling approach. The paper uses three proxies for financial depth: broad money supply; domestic credit to private sector; and domestic credit provided by the banking sector. The results of this study prove that financial depth, inflation, and economic growth are cointegrated, indicating the presence of a long-run equilibrium relationship between these variables. The study also finds that financial depth, inflation, and economic growth are Granger-causing each other. It is therefore recommended that both India and Pakistan should intensify their financial depth in order to increase economic growth and reduce inflation.

Suggested Citation

  • Rudra P. Pradhan & Yasuyuki Nishigaki & John H. Hall, 2017. "The multivariate dynamic causal relations between financial depth, inflation, and economic growth," Philippine Review of Economics, University of the Philippines School of Economics and Philippine Economic Society, vol. 54(1), pages 63-93, June.
    • Handle: RePEc:phs:prejrn:v:54:y:2017:i:1:p:63-93
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    JEL classification:

    • O43 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Institutions and Growth
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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