Abstract:
A growing line of research emphasizes the requirement of a well-functioning financial
system for a sustained economic growth. Meanwhile, a good financial system is
characterized by its continuous growth. This encourages hypothesizing significant
economic growth effects of financial development. Therefore this study investigates
short-run and long-run relationship between financial development and economic
growth with reference to South Asian countries. However, due to data constraint, only
India, Nepal, Pakistan, and Sri Lanka are considered over the period 1995 to 2012.
Broad money supply to the GDP and bank deposits to GDP are taken as proxies for
financial depth and banking sector development respectively. Long-panel estimation
techniques of Mean Group, Pool Mean Group, and Dynamic Fixed Effect models are
used in obtaining the results. Findings of the study indicate that the development of
financial depth is significantly influencing economic growth in short-run, while the
development in banking sector depicts long-run growth effects. As expected, growth
effects are faster through banking sector development, since its’ speed of adjustment
to the long-run is relatively high. However, development in financial depth carries
faster growth effects for India and Sri Lanka.
