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Does Financial Growth lead Economic Performance in India? Causality-Cointegration using Unrestricted Vector Error Correction Models

Kamat, Manoj and Kamat, Manasvi (2007): Does Financial Growth lead Economic Performance in India? Causality-Cointegration using Unrestricted Vector Error Correction Models.

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Abstract

Using contemporary models this paper explores the time-series properties of financial infrastructure and economic growth indicators to investigate the nexus between developments in financial intermediation with the economic growth for India over the 1971-2004 periods. Both over short-run and the long-run perspective the paper seeks to answer; whether the financial infrastructure variables are complementary or a substitute for economic performance? and in what way economic growth is affected by the financial infrastructural development indicators? We find evidence in favor of a short run “financial infrastructure led economic growth”. Finance is found to be a leading sector only in the short-term link in Granger causality tests with stationary variables. The study provides robust empirical evidence in favor of supply leading hypothesis for the Indian economy.

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