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Financial development and economic growth: a cointegration and error-correction modeling approach for south Asian countries

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  • Md abdul Wadud

    (Department of Economics, Rajshahi University)

Abstract

This paper assesses long-run causal relationship between financial development and economic growth for South Asian countries - India, Pakistan and Bangladesh for the period 1976 -2008. Financial development emanates from financial systems that encourage financial stability and foster a framework for the implementation of successful economic polices. Financial Systems can be divided into ‘bank-based'' and ‘capital-market-based'' categories. Bank-based financial systems are the close involvement of their banks with industrial firms; banks are the most important source of finance for industry. Capital-market-based financial systems are characterized by highly developed capital markets and banks. Bank-based financial systems may be in a good position to implement successfully expansionary monetary policy and industrial strategy. Financial liberalisation and repression may show a positive association between financial development and economic growth. We conduct cointegrated vector autoregressive model to assess long-run relationship between financial development and economic growth. Empirical results imply a stable relationship between financial development and economic growth for these countries. Results of error correction models indicate Granger causality between financial development and economic growth running from financial development to economic growth.

Suggested Citation

  • Md abdul Wadud, 2009. "Financial development and economic growth: a cointegration and error-correction modeling approach for south Asian countries," Economics Bulletin, AccessEcon, vol. 29(3), pages 1670-1677.
    • Handle: RePEc:ebl:ecbull:eb-09-00283
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    More about this item

    Keywords

    Financial Development; Economic Growth; Cointegrated Vector Autoregressive Model; South Asian Countries.;
    All these keywords.

    JEL classification:

    • C3 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables
    • E0 - Macroeconomics and Monetary Economics - - General

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