A Causal Analysis of Financial Development and Economic Growth

Abstract In terms of cause and effect, financial development and economic growth relationship has been a major empirical issue for researchers and policy makers. This study explores the causal linkages between financial development and economic growth catering for country specificity and structural shocks pertaining to different cross sections in SAARC and ASEAN countries by calling in the bootstrapping technique proposed by Kónya (2006). We considered the panel estimation to allow for contemporaneous correlations and performed Wald test for Granger Causality with country specific bootstrap critical values catering for structural breaks. Empirical investigation reveals the existence of both the demand and supply leading phenomena for the selected period of 1980–2017. The direction of causality is sensitive measures and proxies used for financial development.