Is financial sector development an engine of economic growth? evidence from India

Ziaurrahman, Muhammad and Masih, Mansur (2016): Is financial sector development an engine of economic growth? evidence from India.

Abstract

The question whether financial development leads to economic growth is the interest of many studies which have very crucial policy implications. However, there exist conflicting results as to which variable (financial development/economic growth) is causing whom. The purpose of this paper is to predict whether the financial sector development leads to economic growth. India has been taken as an investigation case because, to the best of our knowledge, India has never been the interest of this kind of study by applying time series techniques such as Autoregressive distributed lags (ARDL) and VECM methods for the period as recent as from 1960 up until 2013. This study found that there is a long run (co-integration) relationship between economic growth and financial sector development as experienced by India. The study observed causal relationship from financial sector development to economic boom i.e. financial market is found exogenous (leader) while economic growth is endogenous (follower). From the policy point of view, the study suggests that if government wants to enhance economic growth, it can do so by reformations in financial sector. Hence, India should consider financial sector as the policy variable (because of its exogenous nature) to bring reformations that will boost economic growth.

• Item Type: MPRA Paper
• Language: English
• Keywords: economic growth, financial market, ARDL, India
• Subjects: C - Mathematical and Quantitative Methods > C2 - Single Equation Models ; Single Variables > C22 - Time-Series Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes; C - Mathematical and Quantitative Methods > C5 - Econometric Modeling > C58 - Financial Econometrics; E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E44 - Financial Markets and the Macroeconomy

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