Document Type : Research Paper
Authors
Abstract
In attempt to determine causes of economic growth, financial development is a basic concept. The key question is whether the causality running from financial development to economic growth, or vice versa. Some economists argue that the financial sector does not have any effect on the real sector of economy. However, a large body of empirical research has found a robust relationship between financial development and economic growth. In order to study financial development in Iran, we use 5 indictors: the ratio of currency on hold to money stock (CM), the ratio of liquid liabilities to GDP (LLY), the ratio of credit allocated to private enterprises to total domestic credit (PRIVATE), credit allocated to private enterprises to GDP (PRIVY), ratio of commercial banks domestic assets to the banking system assets (BANK). For testing causality relationship between financial development and economic growth in terms of the above indicators, we use Granger causality test based on an autoregressive model, unit root and Cointegration tests. The results revealed that in the case of Iran, there is a two-way long-run causality relationship between LLY and economic growth. Also, one-way long-run causality relationship from PRIVY to economic growth, and so for multilateral index. In short-run the results suggest that causality running from GDP to PRIVY, but for other indicators the Granger causality is not accepted.
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