Examine the Long Run Relationship between Financial Development and Economic Growth in India: Evidence from Vector Error Correction Model (VECM)

Abstract

This study examines the relationship between financial development and economic growth in India after the reform. The present study used monthly data from the period January 1994 to December 2011. The empirical result found that there exist two cointegrating equations and the Vector Error Correction Result shows that in the long run the stock market is affecting economic growth negatively but the increase of bank credit affects the economy positively. The result also found that money supply has negative impact on economic growth in the long run, whereas, tread openness has no impact on economic growth in the long run. From the policy implication point of view the study suggest that the evolution of financial sector tends to or is more likely to stimulate and promote economic growth when monetary authorities adopt liberalised and openness policies, to improve the size of the market intone with the macroeconomic stability.

Keywords: Finance, Development, Cointegration, Error Correction, Economic Growth, Correlation