Does financial system of South Asian countries perform a passive role in economic growth? Can we specify any particular channel that can boost economic development more efficiently? Does the intra and interrelationship among the major segments of financial system point to any change in the structure in near future? These are the major issues that we have examined in detail in the present article. Our findings suggest that though finance is an important determinant of growth, it is also influenced by the economic development in the South Asian countries. Structure of financial system and channel that influences economic growth varies. Banking sector and equity market perform a complementary role in the growth process. Although all countries under the study are less developed, we observed that their reliance on capital market cannot be considered as exception. There is also a faint indication of gradual domestic integration of financial system of the sample countries.
Akaike, H. (1974), ‘A New Look at the Statistical Model Identification’, Institute of Electrical and Electronics Engineers, Tansactions on Automatic Control, AC-19, pp. 716–23.
2.
AlSharkas, A. (2004), ‘ The Dynamic Relationship between Macroeconomic Factors and the Jordanian Stock Market ’, International Journal of Applied Econometrics and Quantitative Studies, 1(1): 97–114 .
3.
Andersen, T.B. and F. Tarp (2003), ‘ Financial Liberalization, Financial Development and Economic Growth in LDCs ’, Journal of International Development, 15(15): 1041–51 .
4.
Arestis, P. , P.O. Demetriades and K.B. Luintel (2001), ‘ Financial Development and Economic Growth: The Role of Stock Markets ’, Journal of Money, Credit, and Banking, 33(1): 16–41 .
5.
Beck, T. and R. Levine (2004), ‘ Stock Markets, Banks, and Growth: Panel Evidence ’, Journal of Banking and Finance, 28(3): 423–42 .
6.
Beck, T. , R. Levine and N. Loayza (2000), ‘ Finance and the Sources of Growth ’, Journal of Financial Economics, 58(1–2): 261–300 .
7.
Blackburn, K. , N. Bose and S. Capasso (2005), ‘ Financial Development, Financing Choice and Economic Growth ’, Review of Development Economics, 9(2): 135–49 .
8.
Boyd, J.H. and B.D. Smith (1996), ‘ The Coevolution of the Real and Financial Sectors in the Growth Process ’, World Bank Economic Review, 10(2): 371–96 .
9.
Boyd, J.H. and B.D. Smith (1998), ‘ The Evolution of Debt and Equity Markets in Economic Development ’, Economic Theory, 12(3): 519–60 .
10.
Calderon, C. and L. Liu (2003), ‘ The Direction of Causality between Financial Development and Economic Growth ’, Journal of Development Economics, 72(1): 321–34 .
11.
Capasso, S. (2006), ‘Stock Market Development and Economic Growth’. UNU-WIDER, Working Paper No. 2006/102, September, United Nations University, The World Institute for Development Economics Research .
12.
Chang, T. (2002), ‘ Financial Development and Economic Growth in Mainland China: A Note on Testing Demand-Following or Supply-Leading Hypothesis ’, Applied Economics Letters, 9(13): 869–73 .
13.
Deidda, L. and F. Fattouh (2002), ‘ Non-linearity between Finance and Growth ’, Economics Letters, 74(3): 339–45 .
14.
DemirguçKunt, A. and R. Levine (1996), ‘ Stock Market Development and Financial Intermediaries: Stylised Facts ’, World Bank Economic Review, 10(2): 291–321 .
15.
Driffill, J. (2003), ‘ Growth and Finance ’, Manchester School, 71(4): 363–80 .
16.
Dritsakis, N. and A. Adamopoulos (2004), ‘ Financial Development and Economic Growth in Greece: An Empirical Investigation with Granger Causality Analysis ’, International Economic Journal, 18(4): 547–59 .
17.
Engle, R.F. and C.W.J. Granger (1987), ‘ Cointegration and Error Correction: Representation, Estimation and Testing ’, Econometrica, 55(2): 251–76 .
18.
Goldsmith, R.Y. (1969), Financial Structure and Development. New Haven: Yale University Press .
19.
Granger, C.W.J. (1988), ‘ Some Recent Development in a Concept of Causality ’, Journal of Econometrics, 39(1–2): 199–211 .
20.
Greene, W.H. (2006), Econometric Analysis. New Delhi: Pearson .
21.
Hall, P. (1992), The Bootstrap and Edgeworth Expansion. New York: Springer .
22.
Harrison, P. , O. Sussmann and J. Zeira (1999), ‘Finance and Growth: Theory and Evidence’. Federal Reserve Board Discussion Paper No. 35, The Federal Reserve Board .
23.
Humpe, A. and P.D. Mcmillan (2005), ‘Can Macroeconomic Variables Explain Long Term Stock Market Movements: A Comparison of US and Japan’. CRIEF Discussion Paper 0511, Centre for Research in to Industry, Enterprise, Finance and Firm, University of St. Andrews, Scotland, UK . Available at: htt://www.st-andrews.ac.uk/crieff/dp0511 (accessed 18 September 2008).
24.
Johansen, S. (1991), ‘ Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregression Models ’, Econometrica, 59(6): 1551–80 .
25.
Johansen, S. (1995), Likelihood Based Inference in Cointegrated Vector Autoregressive Models. Oxford: Oxford University Press .
26.
Johansen, S. and K. Juselius (1990), ‘ Maximum Likelihood estimation and Procedure for Inference on Cointegration with Application to the Demand for Money ’, Oxford Bulletin of Economics and Statistics, 52(2): 169–210 .
27.
Johansen, S. and K. Juselius (1994), ‘ Identification of the Long-Run and the Short-Run Structure. An Application of the ISLM Model ’, Journal of Econometrics, 63(1): 7–36 .
28.
Kasa, K. (1992), ‘ Common Stochastic Trends in International Stock Markets ’, Journal of Monetary Economics, 29(1): 95–124 .
29.
King, R.G. and R. Levine (1993), ‘ Finance and Growth: Schumpeter Might Be Right ’, Quarterly Journal of Economics, 108(3): 717–37 .
30.
Kwiatkowski, D. , P.C.B. Phillips , P. Schmidt and Y. Shin (1992), ‘ Testing the Null of Stationarity against the Alternative of a Unit Root: How Sure Are We that the Economic Time Series have a Unit Root? ’, Journal of Econometrics, 54(1–3): 159–78 .
31.
Levine, R. (1997), ‘ Financial Development and Economic Growth: Views and Agenda ’, Journal of Economic Literature, 35(2): 688–726 .
32.
Levine, R. (1999), ‘ Law, Finance, and Economic Growth ’, Journal of Financial Intermediation, 8(1–2): 8–35 .
33.
Levine, R. and S. Zervos (1998), ‘ Stock Markets, Banks, and Economic Growth ’, American Economic Review, 88(3): 537–58 .
34.
Lucas Jr, R.E. (1988), ‘ On the Mechanics of Economic Development ’, Journal of Monetary Economics, 22(1): 3–42 .
35.
Lutkepohl, H. and H.E. Reimers (1992), ‘ Impulse Response Analysis of Cointegrated Systems ’, Journal of Economic Dynamics and Control, 16(1): 53–78 .
36.
MacKinnon, J.G. (1996), ‘ Numerical Distribution Functions for Unit Root and Cointegration Tests ’, Journal of Applied Econometrics, 11(6): 601–18 .
37.
McKinnon, R.I. (1973), Money and Capital in Economic Development. Washington D.C: Brookings Institution , 6
38.
Newey, W. and K. West (1994), ‘ Automatic Lag Selection in Covariance Matrix Estimation ’, Review of Economic Studies, 61(4): 631–53 .
39.
Nourzad, F. (2002), ‘ Financial Development and Productive Efficiency: A Panel Study of Developed and Developing Countries ’, Journal of Economics and Finance, 26(2): 138–49 .
40.
Osterwald-Lenum, M. (1992), ‘ A Note With Quantiles of the Asymptotic Distribution of the Maximum Likelihood Cointegration Rank Test Statistics ’, Oxford Bulletin of Economics and Statistics, 54(3): 461–72 .
41.
Phillips, P.C.B. and P. Perron (1988), ‘ Testing for a Unit Root in Time Series Regression ’, Biometrika, 75(2): 335–46 .
42.
Ram, R. (1999), ‘ Financial Development and Economic Growth: Additional Evidence ’, Journal of Development Studies, 35(4): 164–74 .
43.
Ray, H. (2008), ‘ Dynamic Interactions of Exchange Rates, Stock Prices and Macroeconomic Variables in India ’, The ICFAI Journal of Applied Finance, 14(8): 19–33 .
44.
Rioja, F. and N. Valev (2004), ‘ Finance and the Sources of Growth at Various Stages of Economic Development ’, Economic Inquiry, 42(1): 127–40 .
45.
Robinson, J. (1952), The Generalization of the General Theory. In the Rate of Interest and Other Essays. London: Macmillan .
46.
Rousseau, P.L. and P. Wachtel (2000), ‘ Equity Markets and Growth: Crosscountry Evidence on Timing and Outcomes, 1980–1995 ’, Journal of Banking and Finance, 24(12): 1933–57 .
47.
Rousseau, P.L. and P. Wachtel (2002), ‘ Inflation Thresholds and the Finance-Growth Nexus ’, Journal of International Money and Finance, 21(6): 777–93 .
48.
Said, S. and D.A. Dickey (1984), ‘ Testing for Unit Roots in a Autoregressive-moving Average Models of Unknown Order ’, Biometrika, 71(3): 599–607 .
49.
Schwarz, G. (1978), ‘ Estimating the Dimension of a Model ’, Annals of Statistics, 6(2): 61–64 .
50.
Serlatis, A. and M. King (1997), ‘ Common Stochastic Trends and Convergence of European Union Stock Markets ’, The Manchester School of Economics & Social Studies, 65(1): 44–57 .
51.
Shen, Chung Hua and Chien-Chiang Lee (2006), ‘ Same Financial Development yet Different Economic Growth—Why? ’ Journal of Money Credit and Banking, 38(7): 1907–44 .
52.
Stiglitz, J. (1985), ‘ Credit Markets and the Control of Capital ’, Journal of Money, Credit and Banking, 17(2): 133–52 .
53.
Wachtel, P. (2003), ‘ How Much Do We Really Know About Growth and Finance? ’, Federal Reserve Bank of Atlanta Economic Review, 88(1): 33–47 .
54.
Wongbangpo, P. and S.C. Sharma (2002), ‘ Stock Market and Macroeconomic Fundamental Dynamic Interactions: ASEAN-5 Countries ’, Journal of Asian Economics, 13(1): 27–51 .
55.
Yang, J. , R.B. Balyeat and D.J. Leatham (2005), ‘ Futures Trading Activity and Commodity Cash Price Volatility ’, Journal of Business Finance & Accounting, 32(1–2): 297–323 .
56.
Zang, H. and Y.C. Kim (2007), ‘ Does Financial Development Precede Growth? Robinson and Lucas Might Be Right ’, Applied Economics Letters, 14(1–3): 15–19 .
