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Causality between Financial Development and Economic Growth: Evidence from an Indian State

  • Farah Hussain

    ()

    (Department of Economics, Dibrugarh University, Dibrugarh, Assam, India)

  • Deb Kumar Chakraborty

    ()

    (Department of Economics, Dibrugarh University, Dibrugarh, Assam, India)

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    This study aims to examine empirically the relationship between Financial Development and Economic Growth and their causality in the context of Assam, a state in India. The method of Principal Component is employed to construct a financial depth indicator (IFD) that serves as a proxy of financial development in the study. Using time series techniques, the stationarity properties of the data sets are tested, followed by Johansen and Jesulius Cointegration analysis to examine long term relationship between the two variables. The study finds a cointegrating relationship between them. Further, Granger causality tests suggest that Financial Development causes Economic Growth in case of Assam. The impulse response function has been traced out for both the variables. It can be inferred from the study that, financial development in Assam needs to be plunged as it is an important channel through which economic growth nourishes.

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    Article provided by Department of International Business and Economics from the Academy of Economic Studies Bucharest in its journal Romanian Economic Journal.

    Volume (Year): 15 (2012)
    Issue (Month): 35 (September)
    Pages: 27-48

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    Handle: RePEc:rej:journl:v:15:y:2012:i:45:p:27-48
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    1. King, Robert G. & Levine, Ross, 1993. "Finance and growth : Schumpeter might be right," Policy Research Working Paper Series 1083, The World Bank.
    2. von Furstenberg, George M. & Fratianni, Michele, 1996. "Indicators of financial development," The North American Journal of Economics and Finance, Elsevier, vol. 7(1), pages 19-29.
    3. Levine, Ross & Zervos, Sara, 1998. "Stock Markets, Banks, and Economic Growth," American Economic Review, American Economic Association, vol. 88(3), pages 537-58, June.
    4. Klaus Neusser & Maurice Kugler, 1998. "Manufacturing Growth And Financial Development: Evidence From Oecd Countries," The Review of Economics and Statistics, MIT Press, vol. 80(4), pages 638-646, November.
    5. James B. Ang & Warwick J. McKibbin, 2005. "Financial Liberalization, Financial Sector Development And Growth: Evidence From Malaysia," CAMA Working Papers 2005-05, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    6. King, Robert G. & Levine, Ross, 1993. "Finance and growth : Schumpeter might be right," Policy Research Working Paper Series 1083, The World Bank.
    7. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
    8. Graff, Michael, 1999. "Financial development and economic growth: A new empirical analysis," Dresden Discussion Paper Series in Economics 05/99, Dresden University of Technology, Faculty of Business and Economics, Department of Economics.
    9. Panicos O. Demetriades & Khaled A.Hussein, 1995. "Does Financial Development Cause Economic Growth? Time-Series Evidence from 16 Countries," Keele Department of Economics Discussion Papers (1995-2001) 95/13, Department of Economics, Keele University.
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