Re‐Visiting Financial Development and Economic Growth Nexus: The Role of Capitalization in Bangladesh |
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| Authors: | Muhammad Shahbaz Ijaz Ur Rehman Ahmed Taneem Muzaffar |
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| Affiliation: | 1. Department of Management Sciences, COMSATS Institute of Information Technology, Lahore, Pakistan;2. Department of Finance and Banking, Faculty of Business and Accountancy, University of Malaya, Australia;3. School of Business, University of Western Sydney, University of Notre Dame, Sydney Campus, Australia |
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| Abstract: | This paper revisits the relationship between financial development and economic growth in Bangladesh by incorporating trade openness in production function using quarter frequency data over the period of 1976‐2012. We applied combined Bayer–Hanck cointegration approach to examine cointegration among the series. Our empirical evidence suggests that development of financial sector facilitates economic growth but capitalization impedes it. In addition, trade openness stimulates economic growth. Labour is also positively linked to economic growth. The vector error correction model Granger causality results divulge that financial development causes real per capita gross domestic product (GDP) growth, and resultantly, real per capita GDP growth causes financial development in a Granger sense. The results also show that trade and labour Granger cause economic growth. The findings of the paper provide insights for policymakers to use financial development and trade openness as a tool for sustained economic growth in the long run. The paper also suggests policymakers to utilise capitalization in a way that is beneficial for economic growth of Bangladesh. |
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| Keywords: | E1 E44 Financial development trade openness Bangladesh |
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