A Panel Data Analysis on the Relationship between Financial Development and Economic Growth: The Case of Asian Countries

Abstract

The causal relationship between economic growth and financial development is crucial for the dynamics of economic growth and the financial background it generates. However, doubts about the shape of the relationship may lead to indecision in the economic policies to be implemented. The aim of this study is to analyze and provide evidence on the relationship between the two variables in order to overcome this ambivalence. In this panel data analysis of 24 Asian countries covering the 2000-2020 period, firstly Cross-sectionally Augmented Dickey-Fuller (CADF) Unit Root Test, one of the second-generation unit root tests, and then Dumitrescu & Hurlin (2012) Panel Z_NT causality tests were applied. According to the causality test results, there is a bidirectional relationship between GDP and financial development. In addition, gross fixed capital formation (GFCF), which is included in the model as a control variable, is also found to have a bidirectional relationship with both variables. Thus, the evidence supporting the interaction view that combines supply and demand side theories reveals the importance of taking both variables into account in economic policy decisions.