The Long-Run and Causal Relationship among Financial Development, Openness and Economic Growth in Bangladesh: An ARDL Bound Testing and Granger Causality Approach

Abstract

This study examines the long run and causal relationship between economic growth, financial development and openness in Bangladesh by using autoregressive distributed lag (ARDL) bound testing approach of cointegration and error-correction based Granger causality model. ARDL bounds test approach for cointegration is run with Microfit software; ADF, PP unit root tests are carried out with STATA12 software and Granger causality test (VEC model) is done with Eviews9 software. The bounds F-test for cointegration test yields evidence of a long-run relationship between economic growth, financial development and openness. The results show that the long-run estimates of gross domestic product with respect to financial development and trade openness are positive at 1% significant level. So an increase in domestic credit to private sector and foreign trade to GDP ratio results in an increase in gross domestic product in the long-run. The cumulative sum and cumulative sum of squares tests show that the estimated parameters are stable for the sample period. A causal relationship is found from openness (foreign trade) to financial development and financial development (domestic credit to private sector) to gross domestic product.

Keywords: Economic growth, financial development, trade openness, Bangladesh.