| Title : | Financial development and economic growth nexus: evidence from Nepal | | Material Type: | printed text | | Authors: | Somnath Kandel, Author | | Publication Date: | 2016 | | Pagination: | 79p. | | Size: | GRP/Thesis | | Accompanying material: | 5/B | | General note: | Including bibilography | | Languages : | English | | Descriptors: | Banks
Banks and banking
Economic development
Economic growth
| | Keywords: | 'economic growth commercial bank bank bank and banking economic development nepal' | | Class number: | 338.9 | | Abstract: | This study has been conducted to know the long run, short run relationship and causality direction between financial development and economic growth in Nepal by using the time series data of 1970 to 2015. The relationship between financial development and economic growth has received considerable attention in the past several decades. Although there is almost a psychological consensus in all kinds of economics (developed, developing and underdeveloped economy) that financial system play important role for long run economic growth; debate on a direction of causation and level of causation either from finance to growth or vice versa is still ongoing.There are two distinct views of the finance-growth nexus in the traditional development economics. The first view was first proposed by Schumpeter(1911) who contends that services provided by financial intermediaries are essential drivers of innovation and growth. Thus, well-developed financial systems channel financial resources to their most productive use. Schumpeter's view was later formalized by Goldsmith(1969) and so many other studies. In oppose other view which believes real economic growth makes increment of financial activities consequently financial development is possible. This alternative idea was initially proposed by Robinson(1952) later on so many other studies such as Patrick(1966) and Ireland(1994) followed the idea of Robinson.
Since there contemporary literatures are divided on a causality effect of finance growth relationship, this study has also a primary objective to find out the directional of effect between these two sectors. To measure the financial development four different proxy namely i) Broad money to nominal GDP (M2/Y), ii) Domestic credit no nominal GDP (DC/Y), iii) Private sector credit to nominal GDP (PSC/Y) and iv) Commercial bank assets to total assets of commercial bank plus Nepal Rastra Bank (CBA/TA) are used. Similarly to measure the economic growth real GDP per capita (RY/P) is used.
This study has employed causal comparative research designs to deal with financial development and economic growth in context of Nepal. This study is based on secondary sources of data. The sample size has been taken from the 1970 AD to 2015 AD. Total 46 years data has been used. The econometric models used for secondary data analysis consists: i) Augmented Dickey-Fuller test: to test the stationarity of data, ii) Johansen co-integration test: to test the long run relationship between pair wise variable of economic growth and financial development, iii) Granger Causality test: to test the causal relationship and direction of causality between the pair wise variable of economic growth and financial development, and iv) Vector Error Correction Model (VECM): to test the short run dynamics and direction of short run causality between pair wise variable of economic growth and financial development.
This study has found the long run co-integrating relationship and bi-directional causality between financial development and economic growth in Nepalese time series data from 1970 to 2015. This finding is identical with contemporary studies such as Demetriades & Luintel (1996a) of India, Demirhan et al.(2011) of Turkey, Saad(2014) of Lebanon and Oguntade et al.(2014) of Federal Republic of Nigeria. Moreover the findings of this study are consistent with Nepalese studies such as Gautam(2014). However, majority of finding of this study do not support to the studies such as Timsina(2014) and Bhandari & Acharya(2015) who found only uni-directional causality ‘between real GDP per-capita and private sector credit to nominal GDP’. This study partially support to Bista(2016) who found stable long run relationship between financial developments to economic growth in Nepal.
The study supports both demand driven and supply leading hypothesis in case of Nepal. Financial liberalization has improved the functioning of financial system by increasing the availability of funds and allowing risk diversification and increased investment in Nepal because the evidence shows that volume of credit released by Nepalese BFIs to the market was tremendously increased after the 1990 AD when the government adopted the liberalized economic policy in Nepal. This study has identified one phenomenon of Nepalese economy. The developing pace rate of DC/Y and PSC/Y (major proxies of financial development) is statistically found faster than those of economic growth during the period of 1970 to 2015. Therefore, it is justifiable to conclude that the pace of economic growth is too slow as compare to the pace of financial development in Nepal.
Based on the finding recommendation has given that: government and other concern body should emphasize more on how to speed up the economic growth of Nepal by prioritizing the demand driven hypothesis of finance growth relationship. Finally, findings of this study are constrained by the measuring capacity of variables, econometric model used in this study and coverage of Nepalese financial system. There is a more room for further research by using more impactful variables, incorporating the data of other financial sectors of Nepal such as NEPSE, insurance sector, provident funds etc. |
Financial development and economic growth nexus: evidence from Nepal [printed text] / Somnath Kandel, Author . - 2016 . - 79p. ; GRP/Thesis + 5/B. Including bibilography Languages : English | Descriptors: | Banks
Banks and banking
Economic development
Economic growth
| | Keywords: | 'economic growth commercial bank bank bank and banking economic development nepal' | | Class number: | 338.9 | | Abstract: | This study has been conducted to know the long run, short run relationship and causality direction between financial development and economic growth in Nepal by using the time series data of 1970 to 2015. The relationship between financial development and economic growth has received considerable attention in the past several decades. Although there is almost a psychological consensus in all kinds of economics (developed, developing and underdeveloped economy) that financial system play important role for long run economic growth; debate on a direction of causation and level of causation either from finance to growth or vice versa is still ongoing.There are two distinct views of the finance-growth nexus in the traditional development economics. The first view was first proposed by Schumpeter(1911) who contends that services provided by financial intermediaries are essential drivers of innovation and growth. Thus, well-developed financial systems channel financial resources to their most productive use. Schumpeter's view was later formalized by Goldsmith(1969) and so many other studies. In oppose other view which believes real economic growth makes increment of financial activities consequently financial development is possible. This alternative idea was initially proposed by Robinson(1952) later on so many other studies such as Patrick(1966) and Ireland(1994) followed the idea of Robinson.
Since there contemporary literatures are divided on a causality effect of finance growth relationship, this study has also a primary objective to find out the directional of effect between these two sectors. To measure the financial development four different proxy namely i) Broad money to nominal GDP (M2/Y), ii) Domestic credit no nominal GDP (DC/Y), iii) Private sector credit to nominal GDP (PSC/Y) and iv) Commercial bank assets to total assets of commercial bank plus Nepal Rastra Bank (CBA/TA) are used. Similarly to measure the economic growth real GDP per capita (RY/P) is used.
This study has employed causal comparative research designs to deal with financial development and economic growth in context of Nepal. This study is based on secondary sources of data. The sample size has been taken from the 1970 AD to 2015 AD. Total 46 years data has been used. The econometric models used for secondary data analysis consists: i) Augmented Dickey-Fuller test: to test the stationarity of data, ii) Johansen co-integration test: to test the long run relationship between pair wise variable of economic growth and financial development, iii) Granger Causality test: to test the causal relationship and direction of causality between the pair wise variable of economic growth and financial development, and iv) Vector Error Correction Model (VECM): to test the short run dynamics and direction of short run causality between pair wise variable of economic growth and financial development.
This study has found the long run co-integrating relationship and bi-directional causality between financial development and economic growth in Nepalese time series data from 1970 to 2015. This finding is identical with contemporary studies such as Demetriades & Luintel (1996a) of India, Demirhan et al.(2011) of Turkey, Saad(2014) of Lebanon and Oguntade et al.(2014) of Federal Republic of Nigeria. Moreover the findings of this study are consistent with Nepalese studies such as Gautam(2014). However, majority of finding of this study do not support to the studies such as Timsina(2014) and Bhandari & Acharya(2015) who found only uni-directional causality ‘between real GDP per-capita and private sector credit to nominal GDP’. This study partially support to Bista(2016) who found stable long run relationship between financial developments to economic growth in Nepal.
The study supports both demand driven and supply leading hypothesis in case of Nepal. Financial liberalization has improved the functioning of financial system by increasing the availability of funds and allowing risk diversification and increased investment in Nepal because the evidence shows that volume of credit released by Nepalese BFIs to the market was tremendously increased after the 1990 AD when the government adopted the liberalized economic policy in Nepal. This study has identified one phenomenon of Nepalese economy. The developing pace rate of DC/Y and PSC/Y (major proxies of financial development) is statistically found faster than those of economic growth during the period of 1970 to 2015. Therefore, it is justifiable to conclude that the pace of economic growth is too slow as compare to the pace of financial development in Nepal.
Based on the finding recommendation has given that: government and other concern body should emphasize more on how to speed up the economic growth of Nepal by prioritizing the demand driven hypothesis of finance growth relationship. Finally, findings of this study are constrained by the measuring capacity of variables, econometric model used in this study and coverage of Nepalese financial system. There is a more room for further research by using more impactful variables, incorporating the data of other financial sectors of Nepal such as NEPSE, insurance sector, provident funds etc. |
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