Innovation and economic growth: evidence from financial institutional innovation

Abstract

Innovation is the key to bringing changes in the traditional financial system. Innovation in the financial system being new financial products, hybrid financial institutions and new rules and regulations to reform existing financial system. Evolvement of financial institutions in the economy help economy in performing a financial function more effective and efficiently and such performance of financial institution promotes economic growth. The aim of the study to assess the relationship between institutional innovation and economic growth of Bangladesh over the period from 1991 to 2015. During this study, we employ the various econometric model to established association ship between institutional innovation and economic growth. Study results revealed that all the variables are stationary at level and after first difference all the variables become non-stationary. Test of Cointegration results revealed that innovation in the financial system through non-bank financial institutions and the financial market can contribute long run and CPI and spread rate can contribute in short run in the economic growth of Bangladesh. While Granger Causality Test revealed that Capital flow and GDP shows unidirectional causality but financial market development and GDP shows the Bidirectional causal relationship in the economy. It is also observed from causality analysis that capital flow and financial market development shows bidirectional causality, which indicated that innovation either in a financial institution or financial market can cause both variables and eventually influence on economic growth. So policymaker should consider the interrelationship between institutional innovation and economic growth while the formulation of economic policy because policy should expedite the development process in the financial system by making robust financial sector through encouraging financial innovation with banks, non-banks financial institution and capital market as well. Robust financial development can cause positively in overall economic growth in Bangladesh.