Financial sector development and economic growth: Empirical evidence from Bangladesh

Abstract

For centuries, researchers have focused on the question “Whether the demand for growing financial sector is created by economic development or the financial development influences economic growth”. This paper empirically examines the association between financial development and economic growth in Bangladesh using time series data over the period of 1977-2016. In order to fulfill the main objective it has adopted Johansen Co-integration test and Granger-causality test in Vector Error Correction Model (VECM) framework. The study has found the significant long-run causality from financial development to economic growth in Bangladesh. Furthermore, the investigation confirmed that the disequilibrium in long-run GDP growth rate is corrected by 43.84% in short-run i.e. next following year. In addition, variance relation among the variables has examined by using variance decomposition model. The findings of this study have brought to light the propulsive role of financial development, particularly credit circulation to private sector, in economic activities in Bangladesh.