Association Between Economic Growth and Financial Development: An Econometric Analysis

The paper examines the causal relationship between economic growth and financial development in India for the period from 1980 to 2011 using annual data. The paper uses Johansen approach to cointegration to examine the existence of a long-run relationship among economic growth and financial development for India, tests for Granger causality within the Vector Error Correction Model (VECM) and examines the stability of the parameters over time. The findings indicate one cointegrating vector and one direction Granger causality running from financial development to economic growth. These evidences suggest that growing economies need efficient financial sector.