Reconsidering the Finance-Growth Nexus in Asian Countries: A Panel ARDL Approach

Financial sector is a vital segment of an economy. To elucidate its role in economic growth, this paper empirically examines its role for Asian countries. We examine and quantify this long run relationship for a sample of 12 Asian countries with data on relevant variables for a large time dimension (1970 to 2012). Panel Autoregressive Distributed Lag model (ARDL) is used to find long run relationship. Panel ARDL being a heterogeneous panel estimation technique allows the slope and short run parameters to vary across the countries. Results show the presence of long run relationship between financial development and national income. The positive contribution of financial development is quantified using Fully Modified OLS and dynamic OLS as well as. Bi-causality is also found between financial development and economic growth. Recommendations are made on the basis of empirical analysis.