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Does Nepal's Financial Structure Matter for Economic Growth?

Author

Listed:
  • Ram Sharan Kharel, Ph.D.

    (Nepal Rastra Bank)

  • Dilli Ram Pokhrel, Ph.D.

    (Nepal Rastra Bank)

Abstract

Despite causality debate, a number of empirical literatures (Pagano, 1993 and Levine, 1997, among others) suggest a positive relationship between financial sector development and economic growth. Moreover, there remains further debate whether the country's financial structure exerts differential impact on economic growth. Empirical studies across the countries (Rajan and Zingales, 1999 and Arestis et. al. 2004) suggest that banking sector plays a key role in some countries while the capital market has a lead position in others for enhancing economic growth. In this context, this paper investigates the relative merits of banking sector vs. capital market in promoting economic growth in Nepal. The empirical results using Johansen's cointegrating vector error correction model based on aggregate annual data from 1993/9 to 2010/11 suggest that banking sector plays a key role in promoting economic growth compared to capital market in Nepal. It may be either the size of capital market is too small to seek the relationship or it is weakly linked to real economic activities. Our result implies that the policy should focus on banking sector development by enhancing its quality and outreach as it promotes economic growth in Nepal.

Suggested Citation

  • Ram Sharan Kharel, Ph.D. & Dilli Ram Pokhrel, Ph.D., 2012. "Does Nepal's Financial Structure Matter for Economic Growth?," NRB Economic Review, Nepal Rastra Bank, Economic Research Department, vol. 24(2), pages 31-46, October.
    • Handle: RePEc:nrb:journl:v:24:y:2012:i:2:p:3
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    References listed on IDEAS

    as
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    2. Johansen, Soren & Juselius, Katarina, 1990. "Maximum Likelihood Estimation and Inference on Cointegration--With Applications to the Demand for Money," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 52(2), pages 169-210, May.
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    7. Levine, Ross, 2002. "Bank-Based or Market-Based Financial Systems: Which Is Better?," Journal of Financial Intermediation, Elsevier, vol. 11(4), pages 398-428, October.
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    More about this item

    Keywords

    Financial Structure; bank vs. capital market-based financial system; economic growth; error correction model;
    All these keywords.

    JEL classification:

    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation: Models and Applications

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