Testing Finance Growth Nexus:An Auto Regressive Distributed Lag (ARDL) Methodology Approach for Selected SAARC Countries

Financial sector development has attained the attention of development economists since last two decades. It has been believed that this sector contributes positively to economic growth. Countries in the SAARC region have adopted financial sector reforms during the mid-1980s and early 1990s to bring their economies in line with the rest of world. This study has been conducted to analyze the relationship between financial sector development and economic growth in the four major South Asian Association for Regional Cooperation (SAARC) countries including Bangladesh, India, Pakistan and Sri Lanka. Using annual time series data set over the period 1975-2009, this study applied Auto Regressive Distributed Lag Modelling (ARDL) approach to test the existence of long run relationships between financial development and economic growth and finding the short run and long run estimates simultaneously. Our findings suggested that financial reforms taken by these economies have been fruitful to raise saving and capital formation. Moreover, a positive and robust link between financial sector development and economic growth has also been observed for the case of India, Pakistan and Sri Lanka, while for the case of Bangladesh this relationship is negative and significant. We may also conclude that there has been better utilization of resources for productive investment in these economies.