Title : “The Bounds Test Approach for Co-integration and Causality Relationship between Financial Development and Economic Growth in Bangladesh

Authors : Md. Sharif Hossain

Abstract : This paper empirically examined the supply-leading or demand-following hypotheses in case of Bangladesh using time series data for the period of 1974 to 2009. This study involves three prime objectives. At the first step whether each variable contains a unit root is examined using ADF and PP unit root tests. At the second step, the long-run cointegration relationship between financial development and economic growth is examined using the ARDL bounds test approach and finally causality relationship between them is investigated using Granger F-test. The ADF and PP tests results support that all the variables are integrated of order 1. The ARDL bounds test results indicate that there exist three forms of long-run relationships between the variables. The Granger F-test results supports that the supply-leading hypothesis is accepted in Bangladesh economy indicates that at the preliminary stage of economic development in Bangladesh financial development causes the economic growth. Thus it can be said the new policy which is formulated by Bangladesh Bank for contraction money supply to control inflationary rate will be harmful for economic growth. The diagnostic tests results support that the model is well specified, and there are no problems of autocorrelation, heterpscedastcity, normality and ARCH in the model. The CUSUM and CUSUMSQ tests results support that all the coefficients in the error correction model are stable. Therefore policies about economic growth can be made based on the preferred model

Journal : Journal of Business Studies, Faculty of Business Studies, University of Dhaka, Vol. XXXIV, No. 2, 37-51. Volume : XXXIV Year : 2012 Issue : 2
Pages : 37-51 City : Edition : Editors :
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