Dynamics of Financial Development in Co-Integrated Error Correction Mechanism (Ecm): Evidence from Bangladesh
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Published
Sep 1, 2008
Abstract
This paper examines the factors that determine the level of financial development in Bangladesh. Three indicators of financial development are used as dependent variables: broad money, private credit and total bank liability-all percentage of Dross Domestic Product (GDP). Interest rate differential, trade openness, inflation, and exchange rate are included in the regression model as explanatory variables. Dependent and independent variables are found cointegrated and their short run adjustments are also found statistically significant. Among the variables, only interest rate differential is found insignificant. Inflation and exchange rate affect the level of financial development significantly irrespective of indicator selected. Trade openness significantly affects financial development when broad money and private credit indicators are used, but in case of bank liability it is found insignificant. The m- paper also examines the impact of financial sector reform program (FSRP) initiated in on financial development. The study finds that FSRP negatively affects financial development. The policy prescriptions that follow from the findings are to maintain inflation at a low level .and increase the integration of the economy wuh rest of the world
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Keywords
Error Correction Mechanism
References
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• Beck, Thorsten; Asli Demirguc-Kunt and Ross Levine (2004), "Finance, Inequality and Poverty: Cross-Country Evidence," World Bank Policy Research Working Paper No. 3338.
• Berthelemy, J.C. and A. Varoudakis (1996). "Models of Financial Development and Growth: A Survey of Recent Literature", in Hermes, Nand R. Len sink ( ed.) Financial Development and Economic Growth: Theory and Experience from Developing Countries, London: Routledge. Chapter 1, pp.7-29.
• Brownbridge, Martin and Gayi, Samuel ( 1999). "Progress, Constraints and Limitations of Financial Sector Reforms in the Least Developed Countries", Finance and Development Research Programme working paper series, paper no. 07, Institute for Development Policy and Management, University of Manchester, UK.
• Bruno, M. (1979). "Stabilization and Stagflation in a Semi-Industrialized Economy", in R. Dornbusch and J. Frenkel (eds), International Economic Policy: Theory and Evidence, Baltimore: Johns Hopkins University Press.
• Carigwell, C. Ronald and Sudesh Samaroo (1997). "Dynamic Modeling of the Current Accounts: Evidence from the Caribbean". International Economic Journal, voL 11, no.4, pp.39-50.
• Chaugh, Hong Leng and Van-can Thai (2004), "Financial Development and Economic Growth: Evidence from Causality Tests for GCC Countries," IMF Working Paper (WP)/04.
• Choong, Chee Keong; ZulkornainYusop; Siong Hook Law and Venus Liew Khim Sen (2003), "Financial Development and Economic Growth in Malaysia: The Stock Market Perspective," www.econwpa. wustle.edu-8089/eps/mac/papers/0307 1030 701 O.pdf viewed on June 11, 2006.
• Choudhury, Toufic A., Moral, Md. Liakat Hossain and Banerjee, Prasanta Kumar (2000). "An Evaluation of the Impact of Reforms in the Financial Sector", Studies in Bangladesh Banking, Bangladesh Institute of Bank Management, Dhaka, pp.l-49.
• De Gregorio, J. and Guidotti, P.E. (1995). "Financial Development and Economic Growth", World Development, vol.23, no.3, pp.433-448.
• Dickey, D.A. and W.A. Fuller ( 1979), "Distribution of Estimators for Autoregressive Time Series with a Unit Root", Journal of the American Association vol.74, pp.427-43l.
• Edwards, S. (1986). "Are Devaluation Contractionary", Review of Economics and Statistics, vol.68, pp. 50 l-508.
• Engle, R.F. and C. W .J. Granger ( 1987). "Co-integration and Error Correction: Representation, Estimation and Testing"., Econometrica, vol.55, pp.251-276.
• Garcia, V .F. and Liu, L. ( 1999). "Macroeconomic Determinant of Stock Market Development", Journal of Applied Economics, vol.2, no.l, pp.29-59.
• Ginebri, Sergio; Giacomo Petrioli, and Laura Sabani (2001). "Financial Deepening, Trade Openness and Growth: a Multivariate Cointegrated Analysis of the Complementary Effects", CIDEI WP No. 62.
• Goldsmith, R.W. (1969), "Financial Structure and Development" Yale University Press, New Haven, CT.
• Graff, M. (2001), "Financial Development and Economic Growth in Corporatist and Liberal Market Economies". Paper presented at the 301 h Annual Conference of Economists. Perth, September 24'h.
• Gujarati, Damodar N. (1995). Basic Econometrics, (3rd ed). McGraw-Hill, Inc.: India.
• Gylfason, T. and Radetzki, M. ( 198 5). "Does Devaluation Make Sense in the Least Developed Countries?", Institute for International Economic Studies, University of Stockholm, liES Seminar Paper No. 314, Stockholm.
• Gylfason, T. and Risager, 0. (1984). "Does Devaluation Improve the Current Account?" European Economic Review, vol.25, 37-64.
• Gylfason, T. and Schmid, M. (1983). "Does Devaluation Cause Stagflation?" Canadian Journal of Economics, vol.l6, 641-654.
• Hanson, J.A. ( 1983). "Contractionay Devaluation, Substitution in Production and Consumption and the Role of Labor Market", Journal of International Economics, vol. 14, pp.l79-189.
• Hassan, A.F.M. Kamrul (2005), "Impact of Financial Sector Reform on Financial Intermediation in Bangladesh-An Empirical Assessment", an unpublished M.Phil. thesis, Department of Finance and Banking, University of Rajshahi, Bangadesh.
• Herrero, Alicia Garcia, Javier Santillan SonsolesGallego, Lucia Cuardo and Carlos (2002), "Latin American Financial Development in Perspective" paper presented in the Madrid seminar of the Eurosystem and Latin American Central Banks, Madrid, 23 May.
• Hondroyiannis, George; Sarantis Lolos and Evangelia Papapetrou (2004), "Financial Markets and Economic Growth in Greece, 1986-1999," Bank of Greece Working Paper No.J7.
• Honohan, P. (2004), "Financial Development, Growth and Poverty: How Close are the I: inks?", in Charles Goodhart ( eds) 'Financial Development and Economic Growth: Explaining the Links', London Palgrave.
• Hossain, Akhter (2000), "Exchange Rates, Capital Flows and International Trade-The Case ofBangladesh, The University Press Limited, Dhaka.
• Jalilian, H. and C. Kirkpatric (2001)' "Financial Development and Povert Reduction in Developing Countries," Working Paper No. 30, IDPM, Manchester University.
• Kamas, L. (1992). "Devaluation, National Output and the Trade Balance: Some Evidence from Colombia". Weltwirtschaftliches Archive, pp.425-444.
• King, R. and Levine, Ross (1993a). "Finance, Entrepreneurship and Growth: Theory and Evidence", Journal of Economics, vol.32, pp.513-542.
• King, Robert G. and Levine, Ross (1993b). "Finance and Growth: Schumpeter Might Be Right". Quarterly Journal ofEconomics, vol.108, no.3, pp.717-37.
• King, R. and Levine, Ross (1993c). "Financial Intermediation and Economic Development"
• Law, Siong Hook and Panicos demetriades (2004), "Capital Inflows, Trade Openness and Financial Development in Developing Countries", www.cas.city.ac.uklconferences/mmf2004/Papers/Law &Demetrieades. pd
• Lynch, D. (1996). "Measuring Financial Sector Development: A Study of Selected Asia Pacific Countries". Developing Economies, vol.34, no.1, pp.3-33.
• Lyons, S.E. and Murinde, V. (1994). "Cointegration and Granger Causality Testing of Hypothesis on Supply-Leading and Demand Following Finance". Economic Notes, vol.23, no.2, pp.308-316.
• Levine, Ross (1998). "The Legal Environment, Banks and Long-Run Economic Growth". Journal of Money, Credit and Banking, vol.30, no.3, pp.596-613.
• Levine, Ross; Loayza, N and Beck, T. (2000). "Financial Intermediation and Economic Growth: Causality and Causes". Journal of Monetary Economics, vol.46, pp.31-77.
• Levine, Ross and Zervos, S. (1998). "Stock Markets, Banks and Economic Growth". American Economic Review, vol.88, no.3, pp.537-558.
• Lizondo, J.S. and Monteil, P.J. (1989). "Contractionary Devaluation in Developing Countries: An Analytical Overview". IMF Staff Paper, no.36.
• McKinnon, Ronald (1973). "Money and Capital in Economic Development". The Brooking institution, Washington, D.C.
• McNulty, James E. (2001), "Legal Systems, Financial Intermediation and the Development of Loan Relationship in the transitional Economies of Central and Eastern Europe", www.bus.umich.edu/jfi/wdi_mcnulty.pdf, viewed 14 May 2006.
• Murinde, V. and F.S.H. (1994). ''Financial Restructuring and Economic Growth in Singapore". Savings and Development, vol.18, no.2, pp.225-246.
• Newey, W. and West, K. (1987). "A Simple, Positive Semi-definite, Heteroscedasticity and Autocorrelation Consistent Covariance Matrix". Econometrica, vol.55, pp. 703-708.
• Phillips, P.C.B. and P. Peron (1988). "Testing for a Unit Root in Time Series Regression". Biometrika, vol.75, 335-346.
• Rother, C.R. (200 I). "Explaining the Behavior of Financial Intermediation: Evidence from Transition Economies". Russian and East European Finance and Trade, VoL37, no.3, pp.77-105.
• Sachs, J.D. and Larrain, F. (1993). "Macroeconomics in Global Economy", New York: Harvester Wheatsheaf.
• Salter, W. ( 1959), "Internal and External Balance-The Role of Price and Expenditure Effects," Economic Records, vol.35, pp.226-238.
• Sargan, J.D. ( 1984). "Wages and Prices in the United Kingdom: A Study in Econometric
• Methodology", in K.F. Wallis and D.F. Hendry (eds.) Quantitative Economics and Econometric Ana(vsis, Basil Blackwell, Oxford.
• Shaw, E. (1973). Financial Deepening in Economic Development. Oxford University Press.
• Swan, T.W. (1960), "Economic control in a Dependent Economy", Economic Record, vol.36, pp.51-66.
• van Wijnbergen, S. ( 1986), "Exchange Rate Management and Stabilization Policies in Developing Countries", Journal of Development Economics, voL 23, pp.227-247.
• Wood, A. (1993). "Financial Development and Economic Growth in Barbados: Causal Evidence". Savings and Development, vol.l7, no.4.
• Agenor, P.R. and Monteil, P.J. (1996), "Development Macroeconomics", Princeton, New Jersy: Princeton University Press.
• Agung, F. and Ford, J. (1998). "Financial Development, Liberalization and Economic Development in Indonesia, 1966-1996: Cointegration and Causality", University of Birmingham, Department of Economics, Discussion Paper No. 98-12.
• Arestis, Philip, Panicos Demetriades, Bassam Fattouh and kostas Mouratidis (2002), "The Impact of Financial Liberalization Policies on Financial development: Evidence from De vel oping Economies", www .le.ac. uk/ economics/research/RePEc/lec/leecon/ econ02- l.pdf, viewed 02 June 2006.
• Aziakpono, Meshach (2003), "Explaining the Behaviour of Financial Intermediation in the Southern African Custom Union Countries: Evidence from a Panel Data Analysis", paper presented in the Eighth Annual Conference on Econometric Modeling For Africa, July 1-4.
• Beck, Thorsten; Asli Demirguc-Kunt and Ross Levine (2004), "Finance, Inequality and Poverty: Cross-Country Evidence," World Bank Policy Research Working Paper No. 3338.
• Berthelemy, J.C. and A. Varoudakis (1996). "Models of Financial Development and Growth: A Survey of Recent Literature", in Hermes, Nand R. Len sink ( ed.) Financial Development and Economic Growth: Theory and Experience from Developing Countries, London: Routledge. Chapter 1, pp.7-29.
• Brownbridge, Martin and Gayi, Samuel ( 1999). "Progress, Constraints and Limitations of Financial Sector Reforms in the Least Developed Countries", Finance and Development Research Programme working paper series, paper no. 07, Institute for Development Policy and Management, University of Manchester, UK.
• Bruno, M. (1979). "Stabilization and Stagflation in a Semi-Industrialized Economy", in R. Dornbusch and J. Frenkel (eds), International Economic Policy: Theory and Evidence, Baltimore: Johns Hopkins University Press.
• Carigwell, C. Ronald and Sudesh Samaroo (1997). "Dynamic Modeling of the Current Accounts: Evidence from the Caribbean". International Economic Journal, voL 11, no.4, pp.39-50.
• Chaugh, Hong Leng and Van-can Thai (2004), "Financial Development and Economic Growth: Evidence from Causality Tests for GCC Countries," IMF Working Paper (WP)/04.
• Choong, Chee Keong; ZulkornainYusop; Siong Hook Law and Venus Liew Khim Sen (2003), "Financial Development and Economic Growth in Malaysia: The Stock Market Perspective," www.econwpa. wustle.edu-8089/eps/mac/papers/0307 1030 701 O.pdf viewed on June 11, 2006.
• Choudhury, Toufic A., Moral, Md. Liakat Hossain and Banerjee, Prasanta Kumar (2000). "An Evaluation of the Impact of Reforms in the Financial Sector", Studies in Bangladesh Banking, Bangladesh Institute of Bank Management, Dhaka, pp.l-49.
• De Gregorio, J. and Guidotti, P.E. (1995). "Financial Development and Economic Growth", World Development, vol.23, no.3, pp.433-448.
• Dickey, D.A. and W.A. Fuller ( 1979), "Distribution of Estimators for Autoregressive Time Series with a Unit Root", Journal of the American Association vol.74, pp.427-43l.
• Edwards, S. (1986). "Are Devaluation Contractionary", Review of Economics and Statistics, vol.68, pp. 50 l-508.
• Engle, R.F. and C. W .J. Granger ( 1987). "Co-integration and Error Correction: Representation, Estimation and Testing"., Econometrica, vol.55, pp.251-276.
• Garcia, V .F. and Liu, L. ( 1999). "Macroeconomic Determinant of Stock Market Development", Journal of Applied Economics, vol.2, no.l, pp.29-59.
• Ginebri, Sergio; Giacomo Petrioli, and Laura Sabani (2001). "Financial Deepening, Trade Openness and Growth: a Multivariate Cointegrated Analysis of the Complementary Effects", CIDEI WP No. 62.
• Goldsmith, R.W. (1969), "Financial Structure and Development" Yale University Press, New Haven, CT.
• Graff, M. (2001), "Financial Development and Economic Growth in Corporatist and Liberal Market Economies". Paper presented at the 301 h Annual Conference of Economists. Perth, September 24'h.
• Gujarati, Damodar N. (1995). Basic Econometrics, (3rd ed). McGraw-Hill, Inc.: India.
• Gylfason, T. and Radetzki, M. ( 198 5). "Does Devaluation Make Sense in the Least Developed Countries?", Institute for International Economic Studies, University of Stockholm, liES Seminar Paper No. 314, Stockholm.
• Gylfason, T. and Risager, 0. (1984). "Does Devaluation Improve the Current Account?" European Economic Review, vol.25, 37-64.
• Gylfason, T. and Schmid, M. (1983). "Does Devaluation Cause Stagflation?" Canadian Journal of Economics, vol.l6, 641-654.
• Hanson, J.A. ( 1983). "Contractionay Devaluation, Substitution in Production and Consumption and the Role of Labor Market", Journal of International Economics, vol. 14, pp.l79-189.
• Hassan, A.F.M. Kamrul (2005), "Impact of Financial Sector Reform on Financial Intermediation in Bangladesh-An Empirical Assessment", an unpublished M.Phil. thesis, Department of Finance and Banking, University of Rajshahi, Bangadesh.
• Herrero, Alicia Garcia, Javier Santillan SonsolesGallego, Lucia Cuardo and Carlos (2002), "Latin American Financial Development in Perspective" paper presented in the Madrid seminar of the Eurosystem and Latin American Central Banks, Madrid, 23 May.
• Hondroyiannis, George; Sarantis Lolos and Evangelia Papapetrou (2004), "Financial Markets and Economic Growth in Greece, 1986-1999," Bank of Greece Working Paper No.J7.
• Honohan, P. (2004), "Financial Development, Growth and Poverty: How Close are the I: inks?", in Charles Goodhart ( eds) 'Financial Development and Economic Growth: Explaining the Links', London Palgrave.
• Hossain, Akhter (2000), "Exchange Rates, Capital Flows and International Trade-The Case ofBangladesh, The University Press Limited, Dhaka.
• Jalilian, H. and C. Kirkpatric (2001)' "Financial Development and Povert Reduction in Developing Countries," Working Paper No. 30, IDPM, Manchester University.
• Kamas, L. (1992). "Devaluation, National Output and the Trade Balance: Some Evidence from Colombia". Weltwirtschaftliches Archive, pp.425-444.
• King, R. and Levine, Ross (1993a). "Finance, Entrepreneurship and Growth: Theory and Evidence", Journal of Economics, vol.32, pp.513-542.
• King, Robert G. and Levine, Ross (1993b). "Finance and Growth: Schumpeter Might Be Right". Quarterly Journal ofEconomics, vol.108, no.3, pp.717-37.
• King, R. and Levine, Ross (1993c). "Financial Intermediation and Economic Development"
• Law, Siong Hook and Panicos demetriades (2004), "Capital Inflows, Trade Openness and Financial Development in Developing Countries", www.cas.city.ac.uklconferences/mmf2004/Papers/Law &Demetrieades. pd
• Lynch, D. (1996). "Measuring Financial Sector Development: A Study of Selected Asia Pacific Countries". Developing Economies, vol.34, no.1, pp.3-33.
• Lyons, S.E. and Murinde, V. (1994). "Cointegration and Granger Causality Testing of Hypothesis on Supply-Leading and Demand Following Finance". Economic Notes, vol.23, no.2, pp.308-316.
• Levine, Ross (1998). "The Legal Environment, Banks and Long-Run Economic Growth". Journal of Money, Credit and Banking, vol.30, no.3, pp.596-613.
• Levine, Ross; Loayza, N and Beck, T. (2000). "Financial Intermediation and Economic Growth: Causality and Causes". Journal of Monetary Economics, vol.46, pp.31-77.
• Levine, Ross and Zervos, S. (1998). "Stock Markets, Banks and Economic Growth". American Economic Review, vol.88, no.3, pp.537-558.
• Lizondo, J.S. and Monteil, P.J. (1989). "Contractionary Devaluation in Developing Countries: An Analytical Overview". IMF Staff Paper, no.36.
• McKinnon, Ronald (1973). "Money and Capital in Economic Development". The Brooking institution, Washington, D.C.
• McNulty, James E. (2001), "Legal Systems, Financial Intermediation and the Development of Loan Relationship in the transitional Economies of Central and Eastern Europe", www.bus.umich.edu/jfi/wdi_mcnulty.pdf, viewed 14 May 2006.
• Murinde, V. and F.S.H. (1994). ''Financial Restructuring and Economic Growth in Singapore". Savings and Development, vol.18, no.2, pp.225-246.
• Newey, W. and West, K. (1987). "A Simple, Positive Semi-definite, Heteroscedasticity and Autocorrelation Consistent Covariance Matrix". Econometrica, vol.55, pp. 703-708.
• Phillips, P.C.B. and P. Peron (1988). "Testing for a Unit Root in Time Series Regression". Biometrika, vol.75, 335-346.
• Rother, C.R. (200 I). "Explaining the Behavior of Financial Intermediation: Evidence from Transition Economies". Russian and East European Finance and Trade, VoL37, no.3, pp.77-105.
• Sachs, J.D. and Larrain, F. (1993). "Macroeconomics in Global Economy", New York: Harvester Wheatsheaf.
• Salter, W. ( 1959), "Internal and External Balance-The Role of Price and Expenditure Effects," Economic Records, vol.35, pp.226-238.
• Sargan, J.D. ( 1984). "Wages and Prices in the United Kingdom: A Study in Econometric
• Methodology", in K.F. Wallis and D.F. Hendry (eds.) Quantitative Economics and Econometric Ana(vsis, Basil Blackwell, Oxford.
• Shaw, E. (1973). Financial Deepening in Economic Development. Oxford University Press.
• Swan, T.W. (1960), "Economic control in a Dependent Economy", Economic Record, vol.36, pp.51-66.
• van Wijnbergen, S. ( 1986), "Exchange Rate Management and Stabilization Policies in Developing Countries", Journal of Development Economics, voL 23, pp.227-247.
• Wood, A. (1993). "Financial Development and Economic Growth in Barbados: Causal Evidence". Savings and Development, vol.l7, no.4.
How to Cite
Mohsin Ali, M., and A. F. M. Kamrul Hassan. 2008. “Dynamics of Financial Development in Co-Integrated Error Correction Mechanism (Ecm): Evidence from Bangladesh”. Studies in Business and Economics 14 (2). https://doi.org/10.29117/sbe.2008.0047.
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