Investigating the Influence of Financial Development Indicators on Economic Growth: Evidence from South Asia

Abstract

The study empirically investigates the influence of Financial Development on Economic Growth in South Asia by using six indicators of Financial Development i-e: Gross Fixed Capital Formation (GFCP), Broad Money (M2), Domestic Credit to Private Sector (DCPS), Market Capitalization (MC), Trade Openness (TO) and Foreign Direct Investment (FDI). While Economic Growth is measured by Real Gross Domestic Product per Capita (GDP). For this purpose, the study used panel data from “World Development Indicators” for the period of 1980-2015 of six major South Asian countries i.e. Pakistan, India, Bangladesh, Bhutan, Sri Lanka and Nepal. These countries have common feature of being under-developed. The study shows its uniqueness by considering six under-developed South Asian countries and applying three result estimation techniques i-e: Pooled Group Mean (PMG), The Mean Group (MG) and The Dynamic Fixed Effect (DFE). Different results were produced through these three techniques. Final conclusion was drawn on the basis of Hausman test; that is PMG model estimation technique. Unit root test was also applied to check stationarity. The long run results of PMG model show significance of all independent variables, while short run results state insignificance of all independent variables except FDI. The results are consistent with the literature. Along with other recommendations, the study, especially, focuses that the trade barriers should be removed among South Asian countries as trade openness has positive influence on economic growth.  It will result in expanding the magnitude of growth.