The Interaction Between Financial Development and Economic Growth: A Novel Application of Transfer Entropy and Nonlinear Approach in Algeria

This study examines the complex interaction between Financial Development (FD) and Economic Growth (EG) in Algeria from 1980 to 2020 using nonlinear modeling techniques. We apply the Non-Linear Causality test with Transfer Entropy, a novel method in this literature, to confirm the nonlinear causality from FD to EG. We also use the Nonlinear Autoregressive Distributed Lag (NARDL) model and the Cumulative Dynamic Multiplier (CDM) to establish the long-run equilibrium and the short-run dynamic relationship between FD and EG. The NARDL results support the Transfer Entropy findings and show that FD has a symmetric impact on EG in both the short and long term. Positive and negative shocks on FD affect EG similarly and the imbalance is corrected in about 6 years. This study provides useful information for policymakers and stakeholders to design policies that promote (EG) and development in Algeria by enhancing FD and mitigating shocks. JEL Codes: C45, C32, E44, O16, O53 Plain Language Summary Finance and economy in Algeria: a stable long-term relationship with short-term shocks We wanted to know how the financial sector and the economy affect each other in Algeria over the past 40 years. We used new and advanced methods to analyze the data. We found that the financial sector and the economy have a one-way relationship that is stable in the long run but can change in the short run due to shocks. We also found that the financial sector and the economy adjust to each other in about 6 years after a shock. Our study can help policymakers and stakeholders improve the financial sector and the economy in Algeria.