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The impact of financial development on economic growth

The impact of financial development on economic growth PurposeThe 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/approachThe Carrion-i-Silvestre et 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.FindingsThe 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/implicationsIn 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/valueTo 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. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png international Journal of Emerging Markets Emerald Publishing

The impact of financial development on economic growth

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Publisher
Emerald Publishing
Copyright
Copyright © Emerald Group Publishing Limited
ISSN
1746-8809
DOI
10.1108/IJoEM-11-2014-0172
Publisher site
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Abstract

PurposeThe 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/approachThe Carrion-i-Silvestre et 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.FindingsThe 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/implicationsIn 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/valueTo 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.

Journal

international Journal of Emerging Markets – Emerald Publishing

Published: Sep 19, 2016

References

  • Financial liberalization, financial development and growth linkages in Sub-Saharan African countries: an empirical investigation
  • Financial development and economic growth in Ghana: does the measure of financial development matter?
  • Financial development and economic growth: another look at the evidence from developing countries
  • What are the mechanisms linking financial development and economic growth in Malaysia?”
  • Some tests of specification for panel data: monte carlo evidence and an application to employment equations
  • Does financial reform raise or reduce saving?