Dynamic Interactions Between Financial Deepening and Economic Growth

Abstract

This dissertation aims at understanding the dynamic interactions between financial deepening and economic growth for the OECD (The Organization for Economic Cooperation and Development) nations. Numerous researchers have analyzed the causal relationships between financial deepening and economic growth. The results produced by the causality studies conducted in the past differ based on the country used for analysis, time periods selected and the variables used in the estimation system. However recent research indicates that there exists a non-linear relationship between financial deepening and economic growth. The relationship between economic growth and financial deepening is an inverted U-shaped curve according to a few researches. This inverted parabola is checked on the high income nations using an ARDL PGM model and the results are positive. The dissertation analyses the non-monotonicity between financial depth indicators and the economic growth indicator using a Threshold Auto Regression (TAR) model. Time Series data for a period of 57 years (1960-2016) were collected on the 21 OECD nations. The TAR model checks for the non-linearity in the data and the obtained results reveal that there exists a nonmonotonic relationship between financial deepening and economic growth. In order to study the problems of excess finance in the high income nations, the OECD nations are ranked based on absolute GDP in an ascending order. They are divided into four quartiles with absolute GDP values with the lowest range in the first quartile and so on. The main aim of dividing the countries into different quartiles is to check if the relationship between economic growth and financial deepening differs based on the stages of economic development of the high income nations. Each quartile is studied under a VAR environment after performing panel unit root tests and panel cointegration tests. The results are interpreted using the impulse response functions...