A simultaneous equations model of finance and growth: FIML estimates for India

In the relationship between economic growth and financial development, it is generally conceded that both variables are likely to be interdependent. However, no attempt has been made so far to estimate a simultaneous equations model to test whether finance causes growth or vice versa. This article uses the Full Information Maximum Likelihood (FIML) method to estimate a two equations model of growth and finance for India to determine the strength of this interdependence. Our results show that Financial Developments (FD) have a small but significant permanent growth effect. However, there is no evidence to support the view that ‘where enterprise leads, finance follows’.