Financial development and economic growth: The case of eight Asian countries

This paper looks at the relationship between financial development and economic growth using time series data for eight Asian countries. First, we estimate augmented production functions where a financial development variable is added. Second, we conduct multivariate causality tests between the growth rate of income and the growth rates of the financial development variables. The regression results show a positive and significant relationship between the income variables and financial variables for India, Malaysia, Pakistan and Sri Lanka. The multivariate causality tests show a two-way causality relationship between the income and the financial variables for India and Malaysia, one-way causality from financial variables to income variables for Japan and Thailand and reverse causality for Korea, Pakistan and Philippines. Thus, our empirical results do not unambiguously support the general view of a clear and positive relationship between financial development and economic growth.