Financial Inclusion and Economic Growth Utilizing Panel Co-Integration

Abstract

This paper attempts to test the co-integration association flanked by financial inclusion and economic growth. The study uses a composite score of financial inclusion and GDP per capita as a proxy of economic growth for its empirical analysis. The panel data covers a large sample of 52 countries for the time period 2005-2015, separated in three groups depending on their income level – low, middle and high. For the analysis, first the study constructed an index of financial inclusion (IFI) utilizing the methodology adopted by Sarma [41]. Then the study applied unit root checks to validate if the variables are non-stationary and co-integrated. Last, the study utilized Pedroni’s panel co-integration analysis to investigate the long-run affiliation. The study also cross checked the results using Fisher’s panel co-integration test. The empirical analysis is based on 11 countries from high income economies, 19 countries from middle income economies and 21 countries from low income economies. The findings confirm a long-run association flanked by economic growth and index of financial inclusion for the middle income countries. This concludes that financial inclusion can contribute substantially to economic growth through better penetration, availability and use of financial services in the middle income countries.