Does Financial Development Cause Economic Growth? Time Series Evidence From India
- Does Financial Development Cause Economic Growth? Time Series Evidence From India
- SAJWAN, Surender Singh
- Issue Date
- KDI School of Public Policy and Management
- This study investigates the causal relationship between financial sector development and
economic growth in time-series format for India. The relationship examined empirically for the time period from 1952 to 2011. Recent studies favor undeniable importance of financial development and economic growth in cross-section and time series format. In this study the close association first will be investigated econometrically by augmented production function with financial development variable by using Ordinary Least Square Estimation Method (OLSEM). Secondly, the multiple variables will be checked for the causality between the growth rate of financial variables and economic growth. The regression results shows that the negative and meaningful relationship between one of the finance variables and economic growth. The Granger-causality tests show the bi-causality between finance variables (BRY and DEP)1 and economic growth. However, there is also an evidence of one way causality between economic growth and finance variable (LOA)2. Thus the empirical results do not clearly shows the positive and meaningful relationship between finance variables and rate of economic growth under isolation as there are some other external factors which can also result in economic growth such as investments, openness of the economy, population etc..These control variables also studied empirically and was found that there is the significant relationship between control variables and economic growth. Thus, my empirical results do not clearly support the clear and positive relationship between financial development and economic growth.
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