Does Financial Development Hamper Economic Growth: Empirical Evidence From Bangladesh

Abstract

The objective of this study is twofold. (a) Construct the first ever financial development index (FDI) for Bangladesh using the principal component method (PCM). (b) Use the FDI to explore the existence of a long run relationship between FDI and economic growth. The Augmented Dickey Fuller and the Ng-Perron unit root tests have been applied to examine the stationarity properties of the series. To explore a long run relation, the Autoregressive Distributed Lag (ARDL) approach to cointegration; and to assess the stability of the parameters, the rolling window regression approach have been used. The results show that the impact of real interest rate (RIR) and FDI on economic growth is negative. Estimates from rolling window method show that FDI and RIR are negatively related to economic growth for the years 1987, respectively. The results may help policymakers formulate effective financial sector policies as a tool to promote economic growth in Bangladesh.

The finance–growth nexus: Does risk premium matter?

“…Jalil and Ma (2008) and Jalil and Feridun (2011) also find that financial development generally supports economic growth in Pakistan. Hye and Islam (2013) investigate the finance-growth connection in Bangladesh using principal component analysis technique as well as the autoregressive distributed lag (ARDL) approach to cointegration and report that the impact of financial development on economic growth is negative. The study rather finds a negligible or weakly negative covariation between financial development and growth of real GDP per capita.…”

“…Using cross-country data for both emerging and advanced countries, the study reveals that NBFIs have a statistically significant negative impact on economic growth and attributes this finding to the loose regulations for NBFIs that might have allowed them to introduce an excessive level of risk into the financial sector in particular and the economy in general. Hye and Islam (2013) investigate the finance-growth connection in Bangladesh using principal component analysis technique as well as the autoregressive distributed lag (ARDL) approach to cointegration and report that the impact of financial development on economic growth is negative. Sassi and Goaied (2013) also observe the negative effect of financial development on economic growth in Middle East and North Africa (MENA) countries.…”

Financial innovation and economic growth in Bangladesh

“…The existing literature suggests that the development of the financial sector has a strong association with economic growth (Asghar and Hussain 2014;Bwirea and Musiime 2015;Comin and Nanda 2014;Duasa 2014;Hye and Islam 2013;Jedidia et al 2014;Khoutem et al, 2014;Kyophilavong et al 2016;Masuduzzaman 2014;Mhadhbi 2014;Ndlovu 2013;Rana and Barua 2015;Saad 2014aSaad , 2014bSunde 2013;Uddin et al, 2014a, b). This association exists because an efficient financial system allows for the effective mobilization of economic resources with higher productivity.…”

The causal nexus between financial development and economic growth in Kenya

“…This paper can be augmented for future research following Shahbaz, (2012) by incorporating foreign capital inflows (Rahman and Shahbaz, 2012) in Cobb-Douglass production function for Kenya; and by implementing the rolling window approach that provides better results, compared to other cointegration approaches (Hye and Islam, 2012).…”