Degree of Financial Development and Economic Growth in Qatar: Cointegration and Causality Analysis

Abstract

Utilizing the cointegration technique and Granger causality test based on the Error Correction Model (ECM), this study empirically investigates the long-run relationship and the direction of causality between the financial development and economic growth in Qatar over the period 1990-2012. The financial development is measured by three alternative indicators: a broad money supply (M2) to GDP ratio, bank credit to the private sector as ratio to GDP, and domestic credit provided by bank sector as ratio to GDP. The economic growth is measured by the growth rate of real GDP. The results suggest that a positive long-run equilibrium relationship exists between all three financial development indicators and the growth rate of real GDP. The causality test results indicate that in the long-run, there is a bidirectional causal relationship between the broad money supply to the GDP ratio and the growth rate of real GDP as well as a unidirectional causality, which runs from domestic credit provided by the bank sector as a percentage of GDP to the growth rate of real GDP. However, a causality relationship does not exist between bank credits to the private sector ratio to GDP and economic growth. In the short-run, the findings show a unidirectional causality running from the growth rate of real GDP to domestic credit provided by the banking sector. However, no causal relationship between the growth rate of real GDP and the other two financial development indicators has been found.

Financial development, trade openness and economic growth in Pakistan: A granger causality approach

“…Our finding on causal relationship from economic growth to domestic credit and trade openness to economic growth conforms to other studies by (Adamopoulos, 2010;Alkhuzaim, 2014;Gokmenoglu et al, 2015;Korkmaz, 2015;Marshal et al, 2015;Mishra et al, 2009;Nwakanma et al, 2014;Vazakidis and Adamopoulos, 2009).…”

Financial Intermediation Development and Economic Growth Nexus in Sri Lanka

“…Some economies show the same reciprocity with bidirectional causality between financial development and economic growth for both private domestic credit and total domestic credit. In line with the above conclusions, Perera and Paudel (2009) and Alkhuzaim (2014) found bi-directional causality with money supply and economic growth. Furthermore, using Egyptian data Abu-Bader and Abu-Qarn (2007) show all measurements for financial development, private domestic credit, ratio of private credit to total domestic credit, money supply and bank deposits, exhibit long-run bi-directional causality with growth.…”

“…Furthermore, Alkhuzaim (2014) confirmed this neutrality hypothesis by using domestic private credit as a financial sector indicator. Results of this study show same neutrality hypothesis in short-run when domestic private credit used as the proxy for financial development.…”

“…This finding was also reported by Odenarian and Udeaja (2010) in their study of the Nigerian economy. Furthermore, Perera and Paudel (2009) also found that domestic private credit had a causal effect in Sri Lanka, and recently, Alkhuzaim (2014) confirmed that domestic credit impacts GDP in the long-run in the economy of Qatar. However, Amarathunga (2010) concludes that the Sri Lankan economy shows only demand following hypothesis, where trade is taken as a financial development measurement and investment as the growth indicator.…”

“…This finding is in line with Robinson's (1952) demand following hypothesis. Alkhuzaim (2014) argued for the same causality for growth to drive financial development in the short-run. Similarly, Perera and Paudel (2009) reported a unidirectional demand following causality hypothesis with economic growth, when narrow money, total domestic credit and private sector credit are used as financial development indicators.…”