Bounds Testing Approaches to the Analysis of Finance-Growth Nexus in the Philippines

By employing a battery of time series techniques including Autoregressive Distributed Lag (ARDL), Vector Error Correction Model (VECM), Impulse Response Function (IRF) and Variance Decomposition (VDC), the paper empirically assesses the short and long-run finance growth nexus during the post-1997 financial crisis period in the Philippines. The study discovers a long-run equilibrium among growth, financial depth, investment and price level. Granger causality tests based on VECM further reveal that there is a unidirectional causality running from growth to financial depth; the finding echoes the ‘growth-led finance hypothesis' or Robinson's (1952) ‘demand following view'. The findings suggest that in order to further promote economic growth, priority should be given to long-run economic growth policies rather than financial reform. Economic growth causes financial institutions to change and develop, and banking sector as well as stock market to grow