Financial sector development and economic growth: The South-Asian experience

This article investigates the relationship between financial sector development and economic growth for three majors South-Asian economies, namely, India, Pakistan, and Sri Lanka. The standard Granger causality tests are employed to determine the pattern of causal linkage between various measures of financial sector development and economic growth. Also, several regression equations are estimated, using the Cobb-Douglas production function framework, in order to analyze the impact of financial sector development on economic growth. Results from causality analysis indicate that financial sector development causes economic growth in the Granger sense. This seems to validate the supply-leading hypothesis. The regression results, using pooled data based on time-series and cross-sectional observations, reinforce the findings of the causality analysis, suggesting that financial sector development has indeed made a significant contribution to economic growth in these countries.