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The paper investigates the empirical link between financial development and economic growth in India. The major objective of this paper is to highlight the structural changes in the Financial Policies, which mainly comprises money and banking sector, during the reform policy promotes economic growth, and financial development and stability. The achievements of these objectives require that financial conditions are such that allocative efficiency is ensured. For this monetary policy should be supplemented by financial sector reforms. We examine theoretically and empirically the McKinnon-Shaw model in India. According to McKinnon, a basic complementarity exists between money and physical capital. The model predicts that a high real investment and promote economic growth. The view stands in sharp contrast with the Neo Classical and Keynesian view which contend that lowering the interest rate will stimulate investment and economic growth. Using time-series data for India for the period of 41 years (1971-2012) i.e. testing unit roots, Co-integration developed by Johanson & Jusilius (1991) and to detect the Causality and to short run and long run dynamics we use the VECM methodology. It traces the positive relationship empirically between Financial Development, GDP, real interest rates, nominal Deposit Rate, Trade Openness in India. Results support continued financial development with effective macroeconomic management. Therefore, this study concludes that policy measures for infrastructure improvements should be taken into account to make financial sectors more vibrant to invigorate economic growth.
This study examines the long-run relationship between the financial development, investment and economic growth for the Indian economy during the period from 1971-72 to 2010-11 by applying Lee and Strazicich (2003 and 2004) unit root test that allows for endogenously determined structural breaks in the series, Gregory and Hansen (1996) cointegration technique that also allows for endogenously determined structural breaks in the relationship and Autoregressive Distributed Lag (ARDL) model of Pesaran and Shin (1999). The empirical results indicate that financial depth, measured as ratio of total bank deposit liabilities to lagged GDP, share of investment in GDP, and real deposit rate have a long-run equilibrium relationship with both economic development measured by real GDP and its one period relative growth rate. However, the relationship between financial depth and economic growth is found to be insignificant. In other words, the estimated results support the view of Lucas (1988) that financial development does not matter for economic growth.
Master's Thesis from the year 2009 in the subject Business economics - General, grade: A, Vanderbilt University (Graduate Program in Economic Development), course: Masters in Economics, language: English, abstract: This study explores the relationship between financial growth and economic development in India using time series data over the period 1950-2007. The majority of the previous studies on this subject have used cross-sectional data, which may not address country specific issues. In addition, many studies used either OLS technique of estimation or bi-variate causality test and may, therefore suffer from the omission-of variable bias. This study attempts to examine the dynamic relationship between financial growth and economic development by including a range of financial variables like, quasi money for monetization, domestic credit for financial intermediation activities and bank asset for financial intermediary institutions. The casual relationship between economic development and financial growth indicators was examined with the help of Granger-Causality procedure based on Unrestricted Vector Auto Regression using the error correction term. The result from the cointegration tests indicates that financial development has a long-run equilibrium with economic growth. The financial sector and real sector move and evolve together in the same direction. The error correction model suggests that, in the short-run, the output variable is the only effective adjustment factor in the system that responds to the fluctuations of financial measures and domestic capital formation. On the other hand, the response of financial intensities and investments are sluggish adjustments that correct the deviation from equilibrium. In nutshell, this study shows that India’s financial development and economic growth are positively correlated; the process of economic development is not sustainable without the contributions of the financial sector and vice versa.
This paper examines the empirical relationship between long–run growth and the degree of financial development, proxied by the ratio of bank credit to the private sector as a fraction of GDP. We find that this proxy enters significantly and with a positive sign in growth regressions on a large cross–country sample, but with a negative sign using panel data for Latin America. Our findings suggest that the main channel of transmission from financial development to growth is the efficiency of investment, rather than its volume. We also present a model where the negative correlation between financial intermediation and growth results from financial liberalization in a poor regulatory environment.
There is a vast body of literature estimating the impact of financial development on economic growth, inequality, and economic stability. A typical empirical study approximates financial development with either one of two measures of financial depth – the ratio of private credit to GDP or stock market capitalization to GDP. However, these indicators do not take into account the complex multidimensional nature of financial development. The contribution of this paper is to create nine indices that summarize how developed financial institutions and financial markets are in terms of their depth, access, and efficiency. These indices are then aggregated into an overall index of financial development. With the coverage of 183 countries on annual frequency between 1980 and 2013, the database should offer a useful analytical tool for researchers and policy makers.
"This paper reviews, appraises, and critiques theoretical and empirical research on the connections between the operation of the financial system and economic growth. While subject to ample qualifications and countervailing views, the preponderance of evidence suggests that both financial intermediaries and markets matter for growth and that reverse causality alone is not driving this relationship. Furthermore, theory and evidence imply that better developed financial systems ease external financing constraints facing firms, which illuminates one mechanism through which financial development influences economic growth. The paper highlights many areas needing additional research"--NBER website
This article investigates how financial development helps to reduce poverty directly through the McKinnon conduit effect and indirectly through economic growth. The results obtained with data for a sample of developing countries from 1966 through 2000 suggest that the poor benefit from the ability of the banking system to facilitate transactions and provide savings opportunities but to some extent fail to reap the benefit from greater availability of credit. Moreover, financial development is accompanied by financial instability, which is detrimental to the poor. Nevertheless, the benefits of financial development for the poor outweigh the cost.