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The Interaction Between Financial Development and Economic Growth: A Novel Application of Transfer Entropy and Nonlinear Approach in Algeria

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  • Abdullah Mohammad Ghazi Al khatib
  • Bayan Mohamad Alshaib
  • Ali Mohamad Kanaan

Abstract

This study examines the complex interaction between Financial Development (FD) and Economic Growth (EG) in Algeria from 1980 to 2020 using nonlinear modeling techniques. We apply the Non-Linear Causality test with Transfer Entropy, a novel method in this literature, to confirm the nonlinear causality from FD to EG. We also use the Nonlinear Autoregressive Distributed Lag (NARDL) model and the Cumulative Dynamic Multiplier (CDM) to establish the long-run equilibrium and the short-run dynamic relationship between FD and EG. The NARDL results support the Transfer Entropy findings and show that FD has a symmetric impact on EG in both the short and long term. Positive and negative shocks on FD affect EG similarly and the imbalance is corrected in about 6 years. This study provides useful information for policymakers and stakeholders to design policies that promote (EG) and development in Algeria by enhancing FD and mitigating shocks. JEL Codes : C45, C32, E44, O16, O53

Suggested Citation

  • Abdullah Mohammad Ghazi Al khatib & Bayan Mohamad Alshaib & Ali Mohamad Kanaan, 2023. "The Interaction Between Financial Development and Economic Growth: A Novel Application of Transfer Entropy and Nonlinear Approach in Algeria," SAGE Open, , vol. 13(4), pages 21582440231, December.
    • Handle: RePEc:sae:sagope:v:13:y:2023:i:4:p:21582440231217871
    DOI: 10.1177/21582440231217871
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    More about this item

    Keywords

    financial development; economic growth; nonlinear modeling; non-linear causality; transfer entropy; NARDL; cumulative dynamic multiplier (CDM);
    All these keywords.

    JEL classification:

    • C45 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Neural Networks and Related Topics
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • 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
    • O53 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Asia including Middle East

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