Financial markets' development and economic growth nexus: An analytical appraisal from Bangladesh

Shakib Hassan Rakib, Md. Shakhaowat Hossin
DOI Number:
The impact of Bangladesh's financial market development on the nation's economic growth from 1993 to 2020 is examined in this article. Unit root tests, cointegration tests, vector error correction models, and causality tests were performed to evaluate the results. As a result, the unit root test at first difference indicated that the variables were stationary. The Johansen cointegration test revealed that the variables were cointegrated, and the vector error correction model revealed that there was a long-term interaction. According to the results of the casualty test, some variables have a unidirectional causal relationship, but other variables do not. The study's findings suggest that promoting financial development frequently affects the economy and the policymakers of the financial market can move forward with potential initiatives by considering the results from this analytical review.
Financial market; Economic growth; Bangladesh; Unit root; Cointegration; Vector error correction; Causality.
Full Text: 
File download

Aali-Bujari, A., Venegas-Martínez, F., & Pérez-Lechuga, G. (2017). Impact of the stock market capitalization and the banking spread in growth and development in Latin American: A panel data estimation with System GMM. Contaduría y Administración, 62(5), 1427-1441.
Abu-Bader, S., & Abu-Qarn, A. S. (2008). Financial development and economic growth: The Egyptian experience. Journal of Policy Modeling, 30(5), 887-898.
Al Karim, R., & Alam, T. (2013). An evaluation of financial performance of private commercial banks in Bangladesh: Ratio analysis. Journal of Business Studies Quarterly, 5(2), 65-77.
Ang, J. B. (2008). What are the mechanisms linking financial development and economic growth in Malaysia?. Economic Modelling, 25(1), 38-53.
Bojanic, A. N. (2012). The impact of financial development and trade on the economic growth of Bolivia. Journal of Applied Economics, 15(1), 51-70.
Chee-Keong, C., & Sok-Gee, C. (2011). Financial development and economic growth: A review. African Journal of Business Management, 5(6), 2017-2027.
Demetriades, P. O., & Hussein, K. A. (1996). Does financial development cause economic growth? Time-series evidence from 16 countries. Journal of Development Economics, 51(2), 387-411.
Durusu-Ciftci, D., Ispir, M. S., & Yetkiner, H. (2017). Financial development and economic growth: Some theory and more evidence. Journal of Policy Modeling, 39(2), 290-306.
Elliott, G., Rothenberg, T. J., & Stock, J. H. (1992). Efficient tests for an autoregressive unit root. Econometrica, 64, 813-836.
Enders, W., & Granger, C. W. J. (1998). Unit-root tests and asymmetric adjustment with an example using the term structure of interest rates. Journal of Business & Economic Statistics, 16(3), 304-311.
Estrada, G. B., Park, D., & Ramayandi, A. (2010). Financial development and economic growth in developing Asia. Asian Development Bank Economics Working Paper No.233.
Granger, C. W. J. (1986). Developments in the study of cointegrated economic variables. In Oxford Bulletin of Economics and Statistics.
Hall, A. (1994). Testing for a unit root in time series with pretest data-based model selection. Journal of Business and Economic Statistics, 12(4), 461-470.
Harris, R. D. (1997). Stock markets and development: A re-assessment. European Economic Review, 41(1), 139146.
Hondroyiannis, G., Lolos, S., & Papapetrou, E. (2005). Financial markets and economic growth in Greece, 1986– 1999. Journal of International Financial Markets, Institutions and Money, 15(2), 173-188.
Hossin, M. S., & Islam, M. S. (2019). Stock market development and economic growth in Bangladesh: An empirical appraisal. International Journal of Economics and Financial Research, 5(11), 252-258.
Johansen, S. (1988). Statistical analysis of cointegration vectors. Journal of Economic Dynamics and Control, 12(2-3), 231-254.
Karimo, T. M., & Ogbonna, O. E. (2017). Financial deepening and economic growth nexus in Nigeria: Supplyleading or demand-following?. Economies, 5(1), 4.
Liang, Q., & Jian-Zhou, T. (2006). Financial development and economic growth: Evidence from China. China Economic Review, 17(4), 395-411.
Liu, W. C., & Hsu, C. M. (2006). The role of financial development in economic growth: The experiences of Taiwan, Korea, and Japan. Journal of Asian Economics, 17(4), 667-690.
Nasir, M. A., Huynh, T. L. D., & Tram, H. T. X. (2019). Role of financial development, economic growth & foreign direct investment in driving climate change: A case of emerging ASEAN. Journal of Environmental Management, 242, 131-141.
Omodero, C. O. (2020). Capital market determinants and market capitalization in Nigeria. International Journal of Financial Research, 11(1), 462-473.
Osakwe, C. I., Ogbonna, K. S., & Obi-Nwosu, V. O. (2020). Stock Market capitalization and economic growth of Nigeria and South Africa (2000-2018). European Academic Research Journal, 7(11), 5605-5623.
Pesaran, M. H., Shin, Y., & Smith, R. J. (2000). Structural analysis of vector error correction models with exogenous I (1) variables. Journal of Econometrics, 97(2), 293-343.
Phuong, L. (2020). Institutions, microeconomic factors and stock market capitalization: Evidence from the EAP countries. Accounting, 6(5), 817-824.
Purewal, K., & Haini, H. (2022). Re-examining the effect of financial markets and institutions on economic growth: evidence from the OECD countries. Economic Change and Restructuring, 55(1), 311-333.
Sethi, D., & Acharya, D. (2018). Financial inclusion and economic growth linkage: Some cross country evidence. Journal of Financial Economic Policy.
Shen, C.-H., & Lee, C.-C. (2006). Same financial development yet different economic growth: Why? Journal of Money, Credit and Banking, 38(7), 1907–1944.
Soedarmono, W., Machrouh, F., & Tarazi, A. (2011). Bank market power, economic growth and financial stability: Evidence from Asian banks. Journal of Asian Economics, 22(6), 460-470.
TARIQ, R., KHAN, M. A., & RAHMAN, A. (2020). How does financial development impact economic growth in Pakistan?: New evidence from threshold model. The Journal of Asian Finance, Economics and Business, 7(8), 161-173.
Thangavelu, S. M., & Beng Jiunn, A. (2004). Financial development and economic growth in Australia: An empirical analysis. Empirical Economics, 29(2), 247-260.
Wong, A., & Zhou, X. (2011). Development of financial market and economic growth: Review of Hong Kong, China, Japan, the United States and the United Kingdom. International Journal of Economics and Finance, 3(2), 111-115.
Wu, J. L., Hou, H., & Cheng, S. Y. (2010). The dynamic impacts of financial institutions on economic growth: Evidence from the European Union. Journal of Macroeconomics, 32(3), 879-891.
Xu, Z. (2000). Financial development, investment, and economic growth. Economic Inquiry, 38(2), 331-344.

Content Status: