Exploring the Linkage Between Financial Development and Economic Growth: the ARDL Bounds Testing approach

Abstract This study investigates the cointegration, short and long run dynamics and causal links between financial development and economic growth in Bangladesh for the period 1973 to 2015. We applied the Autoregressive Distributed Lag (ARDL) Bounds Testing approach and the Granger causality test. The ARDL bounds tests and other cross-checking test confirmed the long run cointegration between economic growth and financial development indicators in Bangladesh. The two financial development indicators, growth in broad money to gross domestic product (GDP) ratio and growth in total deposit liabilities to GDP ratio appeared to have time variant impact on economic growth: the former having significant positive impact in the short- run but negative impact in the long- run, while the latter has significant negative impact in the short- run but positive impact in the long- run. The Granger causality analysis indicated a bidirectional, co-evolutionary process between financial development and economic growth.