| Title : | Impact of financial development on economic growth in Nepal | | Material Type: | printed text | | Authors: | Jagadish Prasad Bist, Author | | Publication Date: | 2016 | | Pagination: | 114p. | | Size: | GRP/Thesis | | Accompanying material: | 6/B | | Languages : | English | | Descriptors: | Economic growth
| | Class number: | 330 | | Abstract: | A healthy financial system that mobilises and efficiently allocates savings and resources to the productive sectors is essential for economic growth. Demirguc-Kunt and Maksimovic (1996) argued that firms in countries with better functioning banks and equity markets grow faster. The importance of the relationship between financial development and economic growth has been well recognized and emphasized in the field of development economics. Studies on finance growth nexus have not been conclusive on whether it is financial development that drives economic growth or whether it is economic growth that drives financial development or each drives the other. Thus, studies of this nature are very important for policy makers and industry leaders in deciding which sector to put emphasis on, whether the real or the financial sector. Once it is determined that there is causality from financial development to economic growth. There should be urgency in making relevant policy recommendations, to facilitate and foster sound growth of the financial sector to gain a sustainable economic development.
This study is conducted to analyze relationship between financial development and economic growth. More specifically, this study has been conducted to test long run cointegrating relationship between financial development and economic growth along with analysis of direction of causality between finance and growth in both long run and short run the case of Nepal for the period of 1984 to 2014. Credit to private sector to GDP ratio is used as a major indicator of the financial development. Similarly, two alternative measures of financial development are used for the robustness of the results, these two alternative measures include, liquid liability to GDP ratio (M3) and commercial banks assets to assets to commercial banks and central banks assets (COC). The economic growth has been measured by real GDP growth and real GDP per capita growth.
For integration and cointegration technique, this study employed Augmented Dickey Fuller (ADF) unit root and ARDL approach to cointegration by Pesaran et al. (1997) in order to test the of stationarity and the long run relationship, respectively. The ARDL approach has been, further, used to analyze the long run dynamics of the finance -growth
ix
relationship. The error correction model has been developed from ARDL approach to analyze the short run relationship between financial development and economic growth. The same model has also been used to analyze the direction of causality in short run. The regression diagnostic tests have also been performed to check the validity of proposed model. The Jarque – Bera (JB) test, Ramsey test, and Lagrange Multiplier (LM) tests are used to test the normality, functional form and serial correlation respectively.
The ARDL bound testing approach to cointegration by Pesaran et al (1997) estimates show that there is fairly a long run cointegrating relationship between growth, financial development, and ancillary control variables. Therefore, it is clear indication that long run causality is one way from financial development to economic growth. The long run estimates of the estimated (p, q, r, s, m, n) models indicate that private credit, the major indicator of the financial development, has economically and statistically significant impact on economic growth in long run. Similarly, alternative measures of financial development (liquid liability, and commercial banks assets to commercial banks and central bank assets ratio) are found to be positively correlated with economic growth. The diagnostic statistics (normality, autocorrelation, and functional form misspecification) show that the used ARDL model seems to be data congruent and free from specification error. Thus, the strong link between finance and growth does not appear to be spurious one. The estimates of short run ARDL error correction model depicted that error correction term (ECM) lagged one period is negative and highly significant in all estimated models indicating financial development, growth, and control variables are cointegrated. Reasonably, large coefficients of ECM term indicate that speed of adjustment to the equilibrium after a shock of previous period is very high. The short run estimates of the model posit that private credit has significant positive impact on economic growth. The short run coefficients for control variables, government consumption, inflation, and trade openness show positive relationship, unlike in long run, with economic growth. This finding suggests that even if high level of inflation positively related to growth in short run, it will severely cause to decline in growth of the economy in long run. The Schumpeter’s view that financial intermediaries are the essential drivers of economic growth has been supported by this study. |
Impact of financial development on economic growth in Nepal [printed text] / Jagadish Prasad Bist, Author . - 2016 . - 114p. ; GRP/Thesis + 6/B. Languages : English | Descriptors: | Economic growth
| | Class number: | 330 | | Abstract: | A healthy financial system that mobilises and efficiently allocates savings and resources to the productive sectors is essential for economic growth. Demirguc-Kunt and Maksimovic (1996) argued that firms in countries with better functioning banks and equity markets grow faster. The importance of the relationship between financial development and economic growth has been well recognized and emphasized in the field of development economics. Studies on finance growth nexus have not been conclusive on whether it is financial development that drives economic growth or whether it is economic growth that drives financial development or each drives the other. Thus, studies of this nature are very important for policy makers and industry leaders in deciding which sector to put emphasis on, whether the real or the financial sector. Once it is determined that there is causality from financial development to economic growth. There should be urgency in making relevant policy recommendations, to facilitate and foster sound growth of the financial sector to gain a sustainable economic development.
This study is conducted to analyze relationship between financial development and economic growth. More specifically, this study has been conducted to test long run cointegrating relationship between financial development and economic growth along with analysis of direction of causality between finance and growth in both long run and short run the case of Nepal for the period of 1984 to 2014. Credit to private sector to GDP ratio is used as a major indicator of the financial development. Similarly, two alternative measures of financial development are used for the robustness of the results, these two alternative measures include, liquid liability to GDP ratio (M3) and commercial banks assets to assets to commercial banks and central banks assets (COC). The economic growth has been measured by real GDP growth and real GDP per capita growth.
For integration and cointegration technique, this study employed Augmented Dickey Fuller (ADF) unit root and ARDL approach to cointegration by Pesaran et al. (1997) in order to test the of stationarity and the long run relationship, respectively. The ARDL approach has been, further, used to analyze the long run dynamics of the finance -growth
ix
relationship. The error correction model has been developed from ARDL approach to analyze the short run relationship between financial development and economic growth. The same model has also been used to analyze the direction of causality in short run. The regression diagnostic tests have also been performed to check the validity of proposed model. The Jarque – Bera (JB) test, Ramsey test, and Lagrange Multiplier (LM) tests are used to test the normality, functional form and serial correlation respectively.
The ARDL bound testing approach to cointegration by Pesaran et al (1997) estimates show that there is fairly a long run cointegrating relationship between growth, financial development, and ancillary control variables. Therefore, it is clear indication that long run causality is one way from financial development to economic growth. The long run estimates of the estimated (p, q, r, s, m, n) models indicate that private credit, the major indicator of the financial development, has economically and statistically significant impact on economic growth in long run. Similarly, alternative measures of financial development (liquid liability, and commercial banks assets to commercial banks and central bank assets ratio) are found to be positively correlated with economic growth. The diagnostic statistics (normality, autocorrelation, and functional form misspecification) show that the used ARDL model seems to be data congruent and free from specification error. Thus, the strong link between finance and growth does not appear to be spurious one. The estimates of short run ARDL error correction model depicted that error correction term (ECM) lagged one period is negative and highly significant in all estimated models indicating financial development, growth, and control variables are cointegrated. Reasonably, large coefficients of ECM term indicate that speed of adjustment to the equilibrium after a shock of previous period is very high. The short run estimates of the model posit that private credit has significant positive impact on economic growth. The short run coefficients for control variables, government consumption, inflation, and trade openness show positive relationship, unlike in long run, with economic growth. This finding suggests that even if high level of inflation positively related to growth in short run, it will severely cause to decline in growth of the economy in long run. The Schumpeter’s view that financial intermediaries are the essential drivers of economic growth has been supported by this study. |
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