The Role of Financial Development in Economic Growth of Nepal: ARDL Approach of Cointegration with Structural Break Analysis
top of page
Asian Institute of Research, Journal Publication, Journal Academics, Education Journal, Asian Institute
Asian Institute of Research, Journal Publication, Journal Academics, Education Journal, Asian Institute

Economics and Business

Quarterly Reviews

ISSN 2775-9237 (Online)

asian institute research, jeb, journal of economics and business, economics journal, accunting journal, business journal, managemet journal
asian institute research, jeb, journal of economics and business, economics journal, accunting journal, business journal, managemet journal
asian institute research, jeb, journal of economics and business, economics journal, accunting journal, business journal, managemet journal
asian institute research, jeb, journal of economics and business, economics journal, accunting journal, business journal, managemet journal
crossref
doi
open access

Published: 26 October 2020

The Role of Financial Development in Economic Growth of Nepal: ARDL Approach of Cointegration with Structural Break Analysis

Ramesh C. Paudel

Tribhuvan University, Nepal

asian institute research, jeb, journal of economics and business, economics journal, accunting journal, business journal, management journal

Download Full-Text Pdf

doi

10.31014/aior.1992.03.04.287

Pages: 1372-1386

Keywords: Financial Development, Economic Growth, ARDL Cointegration with Structural Break

Abstract

This paper, using the most recent index of financial development as developed in Svirydzenka (2016), examines the role of financial development in the economic growth of Nepal. This paper employs the Autoregressive distributed lag (ARDL) approach of cointegration with the structural break in time series data for the period of 1980-2017. Nepal is a unique country with a population of about 30 million with high demographic dividend and big markets in the neighbours, the earlier entrant in the liberalization and reform in the region, endowed with lots of natural resources and beauties, and comparatively cheaper labor force in the region but it remains as one of the poor landlocked developing countries sandwiched between two emerging economies, namely China and India. The results show that financial development has a strong long-run positive relationship with economic growth. Therefore, developing the strategies for the proper financial development improving the financial institution quality and widening the financial market to improve capital formation would be a way to accelerate the economic growth in Nepal.

References

  1. Acaravci, S. K., Ozturk, I., & Acaravci, A. (2009). Financial development and economic growth: Literature survey and empirical evidence from Sub-Saharan African countries. South African Journal of Economic and Management Sciences, 12(1), 11-27.

  2. Acharya, M. (2003). Development of the financial system and its impact on poverty alleviation in Nepal. Economic Review, 15, p134-164.

  3. Adelakun, O. (2010). Financial sector development and economic growth in Nigeria. International Journal of Economic Development Research and Investment, 1(1), 25-41.

  4. Ang, J. B., & McKibbin, W. J. (2007). Financial liberalization, financial sector development and growth: evidence from Malaysia. Journal of Development Economics, 84(1), 215-233.

  5. Arestis, P., & Demetriades, P. (1997). Financial development and economic growth: assessing the evidence. The Economic Journal, 107(442), 783-799.

  6. Asteriou, D., & Price, S. (2000). Financial development and economic growth: Time series evidence for the case of UK. Ekonomia, 4(2), 122-141.

  7. Bagehot, W. (1873). Lombard Street: A Description of the Money Market: Homewood, IL: Richard D. Irwin, 1962 edition.

  8. Balago, G. S. (2014). Financial sector development and economic growth in Nigeria: An empirical investigation. International Journal of Finance and Accounting, 3(4), 253-265.

  9. Chakraborty, I. (2008). Does financial development cause economic growth? The case of India. South Asia Economic Journal, 9(1), 109-139.

  10. Choong, C.-K., & Lam, S.-Y. (2011). Foreign Direct Investment, Financial Development and Economic Growth: Panel Data Analysis. IUP Journal of Applied Economics, 10(2).

  11. De Gregorio, J., & Guidotti, P. E. (1995). Financial development and economic growth. World Development, 23(3), 433-448.

  12. Durusu-Ciftci, D., Ispir, M. S., & Yetkiner, H. (2017). Financial development and economic growth: Some theory and more evidence. Journal of Policy Modeling, 39(2), 290-306.

  13. Estrada, G. B., Park, D., & Ramayandi, A. (2010). Financial development and economic growth in developing Asia. Asian Development Bank, Economics Working Paper No. 233.

  14. Gautam, B. P. (2014). Financial development and economic growth in Nepal. Retrieved from

  15. Goldsmith, R. W. (1969). Financial Structure and Development: New Haven, Yale University Press.

  16. Government of Nepal. (2019). Development Cooperation Report. Retrieved from Ministry of Finance, Government of Nepal, Kathmandu:

  17. Gregory, A. W., & Hansen, B. E. (1996). Residual-based tests for cointegration in models with regime shifts. Journal of Econometrics, 70, 99-126.

  18. Gupta, K. (1984). Finance and Economic Growth in Developing Countries: Croom Helm. London.

  19. Hachhethu, K. (2009). The Communist Party of Nepal (Maoist): Transformation from an insurgency group to a competitive political party. European Bulletin of Himalayan Research, 33(34), 39-71.

  20. Hassan, M. K., Sanchez, B., & Yu, J.-S. (2011). Financial development and economic growth: New evidence from panel data. The Quarterly Review of economics and finance, 51(1), 88-104.

  21. Jayaratne, J., & Strahan, P. E. (1996). The finance-growth nexus: Evidence from bank branch deregulation. The Quarterly Journal of Economics, 111(3), 639-670.

  22. Kabir, M. N., & Halder, P. (2018). Financial sector development and economic growth: empirical evidence from Bangladesh. Asian Economic and Financial Review, 8(6), 799-814.

  23. King, R. G., & Levine, R. (1993). Finance and growth: Schumpeter might be right. The Quarterly Journal of Economics, 108(3), 717-737.

  24. Lawal, A. I., Nwanji, T. I., Asaleye, A., & Ahmed, V. (2016). Economic growth, financial development and trade openness in Nigeria: An application of the ARDL bound testing approach. Cogent Economics & Finance, 4(1), 1-15. doi:10.1080/23322039.2016.1258810

  25. Levine, R. (1997). Financial Development and Economic Growth: Views and Agenda. Journal of Economic Literature, 35, 688-726.

  26. Liang, Q., & Jian-Zhou, T. (2006). Financial development and economic growth: Evidence from China. China Economic Review, 17(4), 395-411.

  27. Liu, W.-C., & Hsu, C.-M. (2006). The role of financial development in economic growth: The experiences of Taiwan, Korea, and Japan. Journal of Asian Economics, 17(4), 667-690.

  28. Luintel, K. B., & Khan, M. (1999). A quantitative reassessment of the finance–growth nexus: evidence from a multivariate VAR. Journal of Development Economics, 60(2), 381-405.

  29. Majid, M. S. A. (2007). Re-examining the finance-growth nexus: Empirical evidence from Indonesia. Gadjah Mad international journal of business, 9(2), 137-156.

  30. Maskay, N. M., & Subedi, S. R. (2009). Development of the Nepalese Financial System: Need for the Formulation of a Master Plan. NRB Economic Review, 21, 31-51.

  31. McKinnon, R. I. (1973). Money and capital in economic development: Brookings Institution Press.

  32. Nepal Rastra Bank. (2019). Monetary policy of Nepal, Fiscal year 2075/76 (BS.). Retrieved from https://www.nrb.org.np/ofg/monetary_policy/Monetary_Policy_(in_Nepali)--2076-77_(Full_Text)-new.pdf(accesed on 26/03/2020):

  33. Paudel, R. C. (2007). Financial liberalisation in Sri Lanka: an econometric analysis. Master Thesis, The University of Wollongong, Australia.

  34. Paudel, R. C. (2016). Liberalization reform and export performance of India. Journal of Economics and Economic Education Research, 17(3), 201.

  35. Paudel, R. C., & Acharya, C. P. (2020). Financial Development and Economic Growth: Evidence from Nepal. NRB Economic Review, 32(1), 15-36.

  36. Paudel, R. C., & Jayanthakumaran, K. (2009). Financial Liberalization and Performance in Sri Lanka: The ARDL Approach. South Asia Economic Journal, 10(1), 127-156.

  37. Perera, N., & Paudel, R. C. (2009). Financial Development and Economic Growth in Sri Lanka. Applied Econometrics and International Development, 9(1), 157-164.

  38. Pesaran, M. H., Shin, Y., & Smith, R. J. (2001). Bounds testing approaches to the analysis of level relationships. Journal of Applied Econometrics, 16, 289-326. doi:10.1002/jae.616

  39. Regmi, U. R. (2012). Stock market development and economic growth: Empirical evidence from Nepal. Administration and Management Review, 24(1), 1-28.

  40. Schumpeter, J. (1934). The Theory of Economic Development: Cambridge: MA: Harvard University Press.

  41. Shaw, E. (1973). Financial Deepening in Economic Development. New York: Oxford University Press.

  42. Shrestha, M. B. (2005). Financial liberalisation in Nepal. PhD Dissertation, The University of Wollongong, Australia.

  43. Solow, R. M. (1956). A Contribution to the Theory of Economic Growth. The Quarterly Journal of Economics, 70(1), 65-94. doi:10.2307/1884513

  44. Soukhakian, B. (2007). Financial Development, Trade Openness and Economic Growth in Japan: Evidence from Granger Causality Tests. International Journal of Economic Perspectives, 1(3), 117-126.

  45. Svirydzenka, K. (2016). Introducing a new broad-based index of financial development. International Monetary Fund. IMF working papers WP/16/5 Washington, DC.

  46. Thangavelu, S. M., & Jiunn, A. B. (2004). Financial development and economic growth in Australia: An empirical analysis. Empirical Economics, 29(2), 247-260.

  47. Timsina, N. (2014). Impact of bank credit on economic growth in Nepal. Nepal Rastra Bank, Working Paper No. 22.

  48. World Bank. (2020). World Development Indicators. from World Bank, http://data.worldbank.org(accessed on 11/03/2020)

bottom of page