Bangladesh Bank Training Academy Journal

Abstract

In recent years, the effect of financial development on economic growth has been paying attention by policy makers and researchers all over the world due to the development and expansion of financial institution and market. A sound and the robust financial system can accumulate capital from various sources and allocate the capital resources to most productive sector effectively. This study examines the pivotal relationship between the financial development and economic growth in Bangladesh using the autoregressive distributed lag (ARDL) approach over the period from 1977 to 2015. Empirical analysis observe the effect of financial development and economic growth through some regression models, concludes that the financial indicators namely domestic credit to private sector by banks (CPS) to gross domestic product (GDP), money supply (M2) to GDP, and stock market capitalization (MC) to GDP has a statistically significant positive effect on GDP per capita. Among these three financial deveopment indicators, money supply has relatively higher and stock market capitalization has a lower significant effect on GDP. ARDL model used to determine the short-run and the long-run relationship among the variables. Bounds test conferred the cointegration or long run relationship between study variables and the long-run co-efficient of domestic credit to private sector by the bank is seemed have statistically positive significant contribution but the long run coefficient of money supply is appeared to be statistically insignificant. In short run,there is a causality running from financial development (domestic credit to private sector by depository banks (CPS) as a percentage of GDP, broad money (M2) as a percentageof GDP, stock market capitalization (MC) as a percentage of GDP) to economic growth.