Does stock market development promote economic growth? A bounds testing analysis for Bangladesh
DOI:
https://doi.org/10.22437/ppd.v6i1.5210Abstract
The aim of this paper is to investigate the linkage between stock market development and real economic growth in Bangladesh using time series data from 1981 to 2017 employing Autoregressive Distributed Lag (ARDL) bounds testing cointegration procedure and Error Correction Model (ECM). The bounds testing cointegration procedures reveal that stock market size has a significant long run impact on real economic growth in Bangladesh at 5% significance level. The results of the estimated ARDL-ECM models show that a highly significant long-run causality is directing from stock market development to real economic growth. The negative and significant error correction term implies that 81% of the last year’s disequilibrium is corrected this year by changes in real economic growth. Finally, we find that there is no causality running between real economic growth and stock market development in the short run. Stock market performance prompts real economic growth in the long run though the contribution of the stock market in Bangladesh related to money market is still in a transition period. Moreover, bank dominating financial system of Bangladesh is nearly seeming close to the catastrophe bring about by massive nonperforming loans and series of banking scams. Thus, policymakers of Bangladesh should give a boost to the stock market as a complimentary financial system with the banking sector such that economic growth will be contributed better than the results of this study demonstrate.
Downloads
References
Ahmed, A.D. & Mmolainyane, K.K. (2014). Financial integration, capital market development and economic performance: empirical evidence from Botswana. Economic Modelling, 42: 1–14. doi:10.1016/j.econmod.2014.05.040
Al-Jafari, M. K., Salameh, R.M. and Habbash, M.R. (2011). Investigating the relationship between stock market returns and macroeconomic variables: evidence from developed and emerging markets. International Research Journal of Finance and Economics, 79: 6-30.
Arif, K.M. (2014). Dynamics of capital market in Bangladesh. Unpublished PhD Thesis, Islamic University, Kushtia, Bangladesh.
Atje, R. & Jovanovic, B. (1993). Stock markets and development. European Economic Review, 37(2-3): 632-640.
Boubakari, A. & Jin, D. (2010). The role of stock market development in economic growth: evidence from some Euronext countries. International Journal of Financial Research, 1(1): 14-20. doi:10.5430/ijfr.v1n1p14
Deb, S.G. & Mukherjee, J. (2008). Does stock market development cause economic growth? a time series analysis for Indian economy. International Research Journal of Finance and Economics, 21: 142-149.
Dima, B. Dinca, M.S. & Spulbar, C. (2014). Financial nexus: efficiency and soundness in banking and capital markets. Journal of International Money and Finance, 47: 100-124. http://dx.doi.org/10.1016/j.jimonfin.2014.05.002
Dritsaki, C. and Melina B. (2005). The Causal Relationship between stock, Credit Market and Economic Development: An Empirical Evidence for Greece, Economic Change and Restructuring, 38: 113-127.
Garcia, V.F. & Liu, L. (1999). Macroeconomic determinants of stock market development. Journal of Applied Economics, 2(1): 29-59.
Goldsmith, R.W. (1969). Financial structure and development. New Haven: Yale University Press.
Haque, M.H. & Fatima, N. (2011). Influences of stock market on real economy: a case study of Bangladesh. The Global Journal of Finance and Economics, 8(1): 49-60.
Hasan, M.A., Sanaullah, M. and Zaman, A. (2017). Cointegration and Causality between Stock Market Development and Economic Growth in Bangladesh. Paper presented at the 20th biennial conference organized by Bangladesh Economic Association on December 21-23, 2017, Dhaka, Bangladesh. Retrieved from http://bea-bd.org/site/images/pdf/new17/40.pdf
Hossain, M.F. & Kamal, K.M.M. (2010). Does stock market development cause economic growth? a time series analysis for Bangladesh economy. Paper presented at the International Conference on Applied Economics, Department of Economic Sciences, National and Kapodistrian University of Athens. Retrieved from http://kastoria.teikoz.gr/icoae/?p=389#more-389
Ibrahim, M. H. (2011). Stock Market Development and Macroeconomic Performance in Thailand. Inzinerine Ekonomika-Engineering Economics, 22(3), 230-240. http://dx.doi.org/10.5755/j01.ee.22.3.513
Jahfer, A. & Inoue, T. (2014). Financial development and economic growth : the role of stock market in Japan. International Review of Business Research Papers, 10(2): 46–61.
Levine, R. (1991). Stock markets, growth, and tax policy. Journal of Finance, 46(4): 1445-65.
Levine, R. & Zervos, S. (1996). Stock market development and long run growth. The World Bank Economic Review, 10(2): 323-39.
Luintel, K. & Khan, M. (1999). A quantitative reassessment of the finance-growth nexus: evidence from a multivariate VAR. Journal of Development Economics, 60(2): 381-405.
McKinnon, R. (1973). Money and capital in economic development. Washington, Brookings Institution.
Nurudeen, A. (2009). Does stock market development raise economic growth? evidence from Nigeria. The Review of Finance and Banking, 1(1): 15-26.
Olweny, T.O. & Kimani, D. (2011). Stock market performance and economic growth: empirical evidence from Kenya using causality test approach. Advances in Management & Applied Economics, 1(3): 153–196.
Pesaran, M.H., and Pesaran, B. (1997). Working with microfit4.0: interactive econometric analysis. Oxford University Press.
Pesaran, M.H., and Shin, Y. (1999). An autoregessive distributed lag modelling approach to cointegration analysis. Chapter 11 in S. Strom (ed.), Econometrics and Economic Theory in the 20th Century: The Ragnar Frisch Centennial Symposium. Cambridge University Press, Cambridge.
Pesaran, M.H., Shin, Y., and Smith, R.J. (2001) Bounds testing approaches to the analysis of level relationships. Journal of Applied Econometrics, 16: 289-326.
Schumpeter, J. (1934). The theory of economic development. Cambridge, Harvard University Press.
Shaw, E.S. (1973). Financial deepening in economic development. New York, Oxford University Press.
Downloads
Published
How to Cite
Issue
Section
License
Copyright (c) 2018 Md. Abu Hasan
This work is licensed under a Creative Commons Attribution 4.0 International License.
