The effect of financial development on economic Growth: Evidence from south Asian developing countries

Abstract

The debate on financial development and economic growth has been comprehensively growing for a long time in the theoretical and empirical literature but there is still conflicting views on this association. Several studies have been conducted on different regions and countries whether banks or stock market finance have any influence on economic growth but the results are still far from a significant conclusion. The empirical findings inclined the view that both banks and stock markets have positive impact on economic growth however some studies support the negative association which may varies on different sample of countries, methodology of the study, proxies for financial development and over time. Based on the ongoing debate, the current study examines the impact of both stock markets and bank based financial development on economic growth in four developing countries of south Asia for the period of 1980-2017.  The study use static, dynamic and long run estimators to efficiently investigate this association. The outcomes specify that both market-based and bank-based financial development indices affect economic growth significantly and positively which indicates that the development of banking system and stock markets perform a very propounding role in strengthening economic growth in the sample countries. The long-run estimators also confirm the presence of long run association between variables. The robustness tests confirm the results of all models that both banks and stock markets development are important and contribute to economic growth in the same way in the sample countries and can’t be differentiated. The findings of this study have important policy suggestions to the sample countries government’s channels, regulatory and supervisory efforts on further improvement of both stock markets and bank-based development in order to attain higher economic growth.