Bangladesh Bank Training Academy Journal

Abstract

The main objective of this study is to examine the empirical cointegration, long and short run dynamics and causal relationships between financial development and economic growth in Bangladesh over the period 1973 to 2015. Employing three different indicators for financial development in the growth form, namely: the ratio of broad money (M2) to GDP, the ratio of total deposit liabilities to GDP, and the ratio of total trade (export plus import) to GDP, the ARDL bounds tests as well as additional cross-checking test convincingly confirmed long run cointegration between economic growth and financial development indicators in Bangladesh. The estimated long run and short run results indicate that, growth in the total trade ratio has insignificant impact on economic growth. However, growth in broad money to GDP ratio and growth in total deposit liabilities to GDP ratio appeared to have time variant impact on economic growth: the former having significant positive impact in the short run butnegative in the long run, while the latter has significant negative impact in the short run but positive in the long run on economic growth. On the whole, Granger causality analysis indicated a bidirectional, co-evolutionary process between financial development and economic growth in the context of Bangladesh.