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Re-examining the finance-growth relationship for a developing economy: A time series analysis of post-reform India

Author

Listed:
  • Sabyasachi Kar

    (Institute of Economic Growth, India)

  • Kumarjit Mandal

    (University of Calcutta, India)

Abstract

The cross-country empirical literature on the finance-growth relationship has debated three propositions. These are (i) Financial deepening has a strong impact on the growth process (ii) Measures of financial “activity” rather than the “size” of the sector plays a more significant role in the growth process and (iii) Financial structure (bank-based versus stock market-based) has no impact on the growth process at all. The present study re-examines the validity of these propositions for a developing economy using the Vector Error Correction Model (VECM) methodology. In the context of the “size versus activity” debate, we also test whether these two aspects of the financial sector can impact growth rates independently. The results support the strong impact of financial deepening on growth but finds that the other propositions are not as robust.

Suggested Citation

  • Sabyasachi Kar & Kumarjit Mandal, 2014. "Re-examining the finance-growth relationship for a developing economy: A time series analysis of post-reform India," Journal of Developing Areas, Tennessee State University, College of Business, vol. 48(1), pages 83-105, January-M.
    • Handle: RePEc:jda:journl:vol.48:year:2014:issue1:pp:83-105
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    Citations

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    Cited by:

    1. Saptarshi Mitra, 2023. "Role of banking credit in sectoral growth and interlinkage in India: post-nationalisation era," Indian Economic Review, Springer, vol. 58(1), pages 231-251, June.

    More about this item

    Keywords

    India; Financial deepening; financial structure; financial activity; economic growth; VECM model.;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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