Shahbaz, Muhammad and Shabbir, Shahbaz Muhammad and Butt, Muhammad Sabihuddin (2011): Effect of financial development on agricultural growth in Pakistan: new extensions from bounds test to level relationships and granger causality tests.
Download (214kB) | Preview
This study investigates the relationship between financial development and agriculture growth employing Cobb-Douglas function which incorporates financial development as an important factor of production for the period 1971-2011. The ARDL bounds testing approach to cointegration is applied to examine long run relationship between the variables. The direction of causality is detected by VACM Granger causality test and robustness of causality results is tested through innovative accounting approach (IAA).
Our findings confirm that the variables are cointegrated for equilibrium long run relationship between agriculture growth, financial development, capital and labor. The results indicate that financial development has a positive effect on agricultural growth. This implies that financial development plays its significant role in stemming agricultural production and hence agricultural growth. The capital use in the agriculture sector also contributes to the agricultural growth. The Granger causality analysis reveals bidirectional causality between agricultural growth and financial development. The robustness of these results is confirmed by innovative accounting approach (IAA). This study has important policy implications for policy making authorities to stimulate agricultural growth by improving the efficiency of financial sector.
|Item Type:||MPRA Paper|
|Original Title:||Effect of financial development on agricultural growth in Pakistan: new extensions from bounds test to level relationships and granger causality tests|
|English Title:||Effect of Financial Development on Agricultural Growth in Pakistan: New Extensions from Bounds Test to Level Relationships and Granger Causality Tests|
|Keywords:||Agriculture Growth, Financial Development, Cointegration|
|Subjects:||Q - Agricultural and Natural Resource Economics ; Environmental and Ecological Economics > Q1 - Agriculture > Q14 - Agricultural Finance|
|Depositing User:||Muhammad Shahbaz|
|Date Deposited:||17. Oct 2011 14:31|
|Last Modified:||12. Feb 2013 11:41|
Afangideh, U. J., 2009. Financial Development and Agricultural Investment in Nigeria: Historical Simulation Approach, Journal of Economic and Monetary Integration, 9, 74-97.
Ahmad, I., Qayyum, A., 2008. Dynamic Modeling of Private Investment in Agricultural Sector of Pakistan, The Pakistan Development Review, 47, 517–530.
Anthony, E., 2010. Agricultural Credit and Economic Growth in Nigeria: An Empirical Analysis, Business and Economics Journal, 14, 1-7.
Arestis, P., Demetriades, P. O. and K. B. Luintel. (2001). Financial Development and Economic Growth: The Role of Stock Markets. Journal of Money, Credit, and Banking. 33 (1), 16-41.
Baum, C. F., (2004). A review of Stata 8.1 and its time series capabilities. International Journal of Forecasting 20(1), 151-161.
Berger, A. N., I. Hassan, and Klapper, L. F. (2004). Further Evidence on the Link between Finance and Growth: An International Analysis of Community Banking and Economic Performance. Journal of Financial Services Research. 45 (3), 169-202.
Bhattacharya, P.C. and Sivasubramanian, M. N. (2003). Financial Development and Economic Growth in India: 1970–1971 to 1998–1999. Applied Financial Economics. 13 (12), 905-909.
Bowers, W. and Pierce, G., (1975). The Illusion of Deterrence in Isaac Ehrlich’s Work on the Deterrent Effect of Capital Punishment, Yale Law Journal, 85(2), pp: 187-208.
Box, G. E. P., Cox, D. R., (1964). An analysis of transformations, Journal of the Royal Statistical Society, 26, 211-252.
Brown, R. L, J. Durbin, and J. M. Evans. (1975). Techniques for Testing the Constancy of Regression Relationships over Time, Journal of the Royal Statistical Society, 2(37): 149-192.
Calderón, C. and Liu, S. (2003). Macroeconomic Dimensions of Infrastructure in Latin America. The World Bank.
Cameron, S., (1994). A Review of the Econometric Evidence on the Effects of Capital Punishment, Journal of Socio-economics, 23(1-2), pp: 197-214.
Chang, T. (2002). Financial Development and Economic Growth in Mainland China: a Note on Testing Demand-following or Supply-Leading Hypothesis. Applied Economics Letters. 9 (13), 869-873.
Clemente, J., Montanes, A and Reyes, M., (1998). Testing for a unit root in variables with a double change in the mean. Economics Letters 59(2), 175-182.
Darrat, A. F., Abosedra, S. S. and Aly, H. Y. (2005). Assessing the Role of Financial Deepening in Business Cycles: The Experience of the United Arab Emirates. Applied Financial Economic. 15 (7), 447-453.
Dawson, P. J. (2003). Financial Development and Growth in Economies in Transition. Applied Economics Letters. 10 (13), 833-836.
DeJong, D. N., Nankervis, J. C., Savin, N. E and Whiteman, C. H. (1992) Integration versus trend stationarity in time series. Econometrica 60(2), pp. 423-433.
Demetriades, P. and Hussein, K. (1996). Does Financial Development Cause Economic Growth? Time Series Evidence from 16 Countries? Journal of Development Economics. 51 (2), 387-411.
Dickey, D. A and Fuller, W. A. (1981) Likelihood ratio statistics for autoregressive time series with a unit root. Econometrica 49(4), pp. 1057-1079.
Edison, H., Levine, L., Ricci, L., Sløk, T., (2002). International Financial Integration and Economic Growth, Journal of International Money and Finance, 21, 749-776.
Ehrlich, I., (1977). The Deterrent Effect of Capital Punishment Reply, American Economic Review, 67 (3), pp: 452-458.
Ehrlich, I., (1996). Crime, Punishment, and the Market for Offenses, Journal of Economic Perspective, 10(1), pp: 43-67.
Elliott, G. R., Thomas, J and Stock, J. H. (1996) Efficient tests for an autoregressive unit root. Econometrica 64(4), pp. 813-836.
Finance Ministry of Pakistan, 2010. Economic Survey of Pakistan (2009-10), Islamabad: Pakistan.
Ghirmay, T. (2004). Financial Development and Economic Growth in Sub-Saharan African Countries: Evidence from Time Series Analysis. African Development Review. 16 (3), 415-432.
Hansen, B. E. (1992). Tests for Parameter Stability in Regressions with I(1) Processes, Journal of Business and Economic Statistics, 10(3): 321-335.
Hsu, C. M. and Lin, S. M. (2000). Financial Development and Endogenous Growth Model. Industry of Free China. 21-47.
Hye, Q. M. A and Wizarat, S., 2011. Impact of financial liberalization on agricultural growth: a case study of Pakistan. China Agricultural Economic Review 3, 191-209.
Khalid, A. M. (2005). Macroeconomic Effects of Financial Reforms in Pakistan. Pakistan Development Review, 45 (3), 961-974.
Khan, M. S. and Senhadji, A. S. (2000). Financial Development and Economic Growth: An Overview. IMF Working Paper, WP/00/209.
King, R. G. and Levine, R. (1993). Finance and Growth: Schumpeter Might be Right. The Quarterly Journal of Economics. 108 (3), 717-737.
Koop, G., M. H. Pesaran and S. M. Potter., 1996. Impulse response analysis in nonlinear multivariate models. Journal of Econometrics 74, 119-147.
Kwiatkowski, D., Phillips, P. C. B., Schmidt, P., Shin, Y., (1992). Testing the Null Hypothesis of Stationarity against the Alternative of a Unit Root, Journal of Econometrics, 54, 159-178.
Layson, S., (1983). Homicide and Deterrence: Another View of the Canadian Time Series Evidence, Canadian Journal of Economics, 16(1), pp: 52-73.
Lihong, Y., Qinggao, L., (2007). The Empirical Analysis on Rural Formal Financial Development and Rural Economic Growth in China, College of Economy and Trade, Shenyang Agricultural University, P.R.China, 110161.
Lorde. T., Waithe, K and Francis, B., 2010. The importance of electrical energy for economic growth in Barbados. Energy Economics 32, 1411-1420.
Luintel, K. B. and Khan, M. (1999). A Quantitative Reassessment of the Finance-Growth Nexus: Evidence from a Multivariate VAR. Journal of Development Economics. 60 (2), 381-405.
Manning, M. J. (2003). Finance Causes Growth: Can We Be So Sure? Contributions to Macroeconomics. 3 (1), 1-22.
Medyawati, H., Yunanto, M., 2011. The Role of Banking, Agriculture and Industrial Sector in Economic Growth in Indonesia, International Journal of Trade, Economics and Finance, 2, 312-317.
Monthly Statistical Bulletins (2010), State Bank of Pakistan, Karachi, Pakistan.
Ng, S and Perron, P. (2001) Lag Length Selection and the Construction of Unit Root Test with Good Size and Power. Econometrica 69(6), pp. 1519-1554.
Ouattara, B., (2004). Modelling the Long Run Determinants of Private Investment in Senegal, The School of Economics Discussion Paper Series 0413, Economics, The University of Manchester.
Parivash, G. H., Torkamani, J., 2008. Effects of Financial Markets Development on Growth of Agriculture Sector. American-Eurasian Journal of Agriculture and Environmental Sciences, 2, 166-165.
Paul, BP and Uddin, G. S., 2010. Energy and output dynamics in Bangladesh. Energy Economics, doi:10.1016/j.eneco.2010.11.011.
Perron, P and Vogelsang, T. J. (1992) Testing for a unit root in a time series with a changing mean: corrections and extensions. Journal of Business & Economic Statistics 10(4), pp. 467-470.
Pesaran, M. H. and Y. Shin., 1999. An autoregressive distributed lag modeling approach to cointegration analysis. Chapter 11 in Econometrics and Economic Theory in the 20th Century: The Ragnar Frisch Centennial Symposium, Strom S. (ed.). Cambridge University Press: Cambridge.
Pesaran, M.H., Shin, Y., Smith, R.J., 2001. Bounds testing approaches to the analysis of level relationships. Journal of Applied Econometrics 16, 289-326.
Phillips, P. C. B and Perron, P. (1988) Testing for a unit root in time series regressions. Biometrika 75(2), pp. 335-346.
Rajan, R. G. and Zingales, L. (1998). Financial Dependence and Growth. American Economic Review. 88 (3), 559-586.
Sala-i-Martin, X. (1997). I Just Ran Four Million Regressions. NBER Working Paper Series.
Schumpeter, J. A. (1911). The Theory of Economic Development. Harvard University Press, Cambridge, MA.
Scumpter, J. A. (1934). Theory of Economic Development. Cambridge, MA: Harvard U, Press.
Shahbaz, M. (2009). A Reassessment of Finance-Growth Nexus for Pakistan: Under the Investigation of FMOLS and DOLS Techniques. ICFAI Journal of Applied Economics. 8 (1), 65-80.
Shahbaz, M., 2010. Income inequality-economic growth and non-linearity: A case of Pakistan. International Journal of Social Economics 37, 613-636.
Shahbaz. M and Khan, R, I., 2010. Old wine in new bottles: saving-growth nexus: innovative accounting technique in Pakistan. Theoretical and Applied Economics 7, 49-60.
Shan, J. (2005) Does financial development ‘lead’ economic growth? A vector autoregression approach. Applied Economics 37(12), pp. 1353-1367.
Shan, J. and Morris, A. (2002). Does Financial Development ‘Lead’ Economic Growth? International Review of Applied Economics. 16 (2), 153-168.
Sharif, S. J. S., Salehi, M., Alipour, M., 2009. Financial Markets Barriers’ in Agricultural Sector: Empirical Evidence of Iran. Journal of Sustainable Development, 2, 96-101.
Sidhu, R. S., Vatta, K., Kaur, A., 2008. Dynamics of Institutional Agricultural Credit and Growth in Punjab: Contribution and Demand-Supply Gap, Agricultural Economics Research Review, 21, 407-414.
Turner, P., 2006. Response surfaces for an F-test for cointegration. Applied Economics Letters 13, 479-482.
Yazdani, S., 2008. Financial Market Development and Agricultural Economic Growth in Iran. American-Eurasian Journal of Sustainable Agriculture, 2, 338-343.
Zivot, E., Andrews, K., (1992), Further Evidence on the Great Crash, the Oil Price Shock, and the Unit Root Hypothesis, Journal of Business and Economic Statistics, 10 (10), pp. 251–270.