Causality between Financial Structure and Economic Growth in Bangladesh: A Toda-Yamamoto Approach
Keywords:
Financial structure, Financial-activity, Financial-size, Financial-efficiency, Economic Growth, Toda-Yamamoto ApproachAbstract
Economists’ views regarding the relationship between financial structure and economic growth has been evolving since 1950s. The empirical studies that support different views used different methods and were conducted on different countries or country groups. For a fast growing economy like Bangladesh, the examination of the relationship between the structure of financial system and economic growth, which this study aims to, helps policy-makers implement financial economic policies. In contrast to the previous studies which employed either the traditional Granger causality test or the Granger causality test based on the Error Correction Model (ECM), this study applies the ‘Granger no-causality test approach’ developed by Toda & Yamamoto (1995) in multivariate Vector Autoregressive (VAR) setting which is estimated as a seemingly unrelated regression (SUR), using time series data of Bangladesh over the period 1981-2018. The results of the Toda- Yamamoto ‘Granger no-causality test’ identify a unidirectional causality from financial efficiency to economic growth, and bi-directional causality between financial size and economic growth in the case of Bangladesh, but there exists no causality between financial activity and economic growth. It implies that the economy grows faster with a relatively bigger size of the financial market compared to bank size and a relatively efficient financial market compared to banks.
References
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Alimi, R. S., Ofonyelu, C. C., (2013). Toda-Yamamoto Causality Test between Money Market Interest Rate and Expected Inflation: The Fisher Hypothesis Revisited. European Journal of Scientific Research, 9(7), 125-142.
Awokuse, T.O., Yang, J., (2002). The informational role of commodity prices in formulating monetary policy: A reexamination. Working Paper No. - FREC SP02-02, Department of Food and Resource Economics, University of Delaware.
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Bencivenga, V.R, Smith, B.D., (1991). Financial intermediation and endogenous growth. Review of Economics Studies, 58,195–209. https://doi.org/10.2307/2297964
Chotikapanich, D., Griffiths, W. E., Skeels, C. L., (2001). Sample size requirements for estimation in SUR models, Department of Economics - Working Papers Series 794, The University of Melbourne, 18 pages.
Chu, N., Oxley, L., Carlaw, K., (2005). ICT and causality in the New Zealand, In Kachitvichyanukul, V., Purintrapiban, U., and Utayopas, P. (Eds.), Economy proceedings of the international conference on simulation and modelling.
Chu, L. K., (2020). Financial Structure and Economic Growth Nexus Revisited, Borsa Istanbul Review, 20(1), 24-36. https://doi.org/10.1016/j.bir.2019.08.003.
Demetriades, P.O., Hussein KA (1996). Does financial development cause economic growth? Time-series evidence from 16 countries. Journal Economics Dynamics & Control, 51, 387–411. https://doi.org/10.1016/S0304-3878(96)00421-X
Demirguc-Kunt, A., Levine, R., (1999). Bank-base and Market-base Financial Systems: Cross-Country Comparisons. Policy Research Working Paper 2143, World Bank.
Demirguc-Kunt, A., Levine, R., (2004). Financial Structure and Economic Growth: A Cross-Country Comparison of Banks, Markets, and Development. The MIT Press, London.
Ekins, P., (2000). Economic growth and environmental sustainability-The prospects for green growth, London: Routledge.
Dritsaki, C., (2017). Toda-Yamamoto Causality Test between Inflation and Nominal Interest Rates: Evidence from Three Countries of Europe. International Journal of Economics and Financial Issues, 7(6), 120-129.
Engle, R. F., Granger, C., (1987). Cointegration and Error Correction: Representation, Estimation and Testing. Econometrica, 55(2), 251-276.
Friedman, M., Schwartz, A.J., (1963). Monetary history of the United States, 1867–1960. Princeton University Press, Princeton.
Gambacorta, L., Jing, Y., Tsatsaronis, K., (2014). Financial Structure and Growth. BIS Quarterly Review, Bank for International Settlements, 21-35. https://ssrn.com/abstract=2457106
Giles, J.A., Mirza, S., (1999). Some Pretesting Issues on Testing for Granger non- Causality, Econometrics Working Paper EWP9914, Department of Economics, University of Victoria.
Goldsmith, R.W. (1969). Financial structure and development. Yale University Press, New Haven.
Granger, C. W. J., (1969). Investigating causal relations by econometric models and cross spectral methods, Econometrica, 37, 424- 38.
Greenwood, J., Jovanovic, B., (1990). Financial development, growth, and the distribution of income. Journal Political Economy, 98, 1076–1107.
Greenwood, J., Smith, B. D., (1997). Financial markets in development, and the development of financial markets. Journal of Economic Dynamic Control, 21, 145–181. https://doi.org/10.1016/0165-1889(95)00928-0
Gutierrez, C., Enrique, C., Souza, C., Reinaldo, Teixeira de Carvalho, Guillén, O., (2009). Selection of Optimal Lag Length in Cointegrated VAR Models with Weak Form of Common Cyclical Features. Brazilian Review of Econometrics, 29(1), 59-78.
Hondroyiannis, G., Lolos, S., and Papapetrou, E., (2004). Financial market and economic growth in Greece, 1986-1999. Working Paper No. 17.
International Monetary Fund (2019). International Financial Statistics (IFS) database 2019.
Inusah, N., (2018). Toda-Yamamoto Granger No-causality Analysis of Stock Market Growth and Economic Growth in Ghana. Journal of Accounting, Business and Finance Research, 3(1), 36-46. https://doi.org/10.20448/2002.31.36-46
Johansen S, Juselius K., (1990). Maximum likelihood estimation and inference on cointegration – With applications to the demand for money. Oxford Bulletin of Economics and Statistics, 52(2), 169–210.
Lal, I., Sulaiman, D., Hussain, A., (2009). Effects of Financial Structure and Financial Development on Economic Growth: A Case Study of Pakistan. European Journal of Social Sciences, 11(3), 418-427. https://www.researchgate.net/publication/200503956
La Porta, R., Lopez-de-Silanes, F., Shleifer, A., Vishny, R. W., (1998). Law and Finance. Journal of Political Economy, 106(6), 1113-1155.
Levine, R., (1997). Financial Development and Economic Growth: Views and Agenda. Journal of Economic Literature, 35, 688–726.
Levine, R., (2002). Bank-Based or Market-Based Financial Systems: Which is better, William Davidson Working Paper No. 442.
Lucas, R. E., (1988). On the mechanics of economic development. Journal of Monetary Economics, 22, 3–42.
Luintel, K. B., Khan, M., Leon-Gonzalez, R., Guangjie, L., (2016). Financial Development, Structure and Growth: New Data, Method and Results. Journal of International Financial Markets, Institutions and Money, 43(C), 95-112. https://doi.org/10.1016/j.intfin.2016.04.002
Maduka, C. A., Onwuka, K. O., (2013). Financial market structure and economic growth: Evidence from Nigeria data. Asian Economic and Financial Review, 3(1), 75-98.
McKinnon, R, I. (1973). Money and capital in economic development. Brookings Institution, Washington.
McQuarrie, A. D., (1999). A small-sample correction for the Schwarz SIC model selection criterion. Statistics & Probability Letters, 44(1), 79-86.
Miche, Y., Lendasse, A., (2009). A faster model selection criterion for OP-ELM and OP-KNN: Hannan-Quinn criterion, ESANN'2009 proceedings, European Symposium on Artificial Neural Networks - Advances in Computational Intelligence and Learning. Bruges (Belgium), 22-24 April 2009.
Oh, W., Lee, K., (2004). Causal Relationship between energy consumption and GDP revisited: The case of Korea 1970-1999. Energy Economics, 26, 51‒59.
Oima, D., Ojwang, C., (2013). Market-Based and Bank-Based Financial Structure on Economic Growth in Some Selected ECOWAS Countries. International Journal of Education and Research, 1(2), 1-10.
Olofin, S. O., Afangideh, U. J., (2008). Financial structure and economic growth in Nigeria: A Macroeconometric Approach. Nigerian Journal of Securities and Finance, 13(1), 47-69.
Pesaran, M. H., Shin, Y., Smith, R., (2001). Bound testing approaches to the analysis of level relationship. Journal of Applied Econometrics, 16(3), 174–189.
Pinno, K., Serletis, A., (2007). Financial structure and economic growth: the role of heterogeneity. Applied Financial Economics, 17(14), 1129-1139. https://doi.org/10.1080/09603100600749238
Phumiwasana, T., (2003). Financial Structure, Economic Growth and Stability, Claremont Graduate University, Department of Economics, Ph.D. Dissertation.
Prochniak, M., Wasiak, K., (2017). The impact of the financial system on economic growth in the context of the global crisis: empirical evidence for the EU and OECD countries. Empirica,44, 295–337. https://doi.org/10.1007/s10663-016-9323-9
Puatwoe, J.T., Piabuo, S.M., (2017). Financial sector development and economic growth: evidence from Cameroon. Financial Innovation, 3(25), 1-18. https://doi.org/10.1186/s40854-017-0073-x
Rambaldi, A.N., Doran, H.E., (1996). Testing for Granger non-causality in cointegrated systems made easy, Working paper in econometrics and applied statistics no. 88, University of New England.
Robinson, J., (1952). The generalization of the general theory. In: Robinson, J., (edited) The rate of interest and other essays. Macmillan, London.
Saibu, O. M., Bowale, E. & Akinlo, A. E. (2009). Financial Structure and Economic Growth: Empirical Evidence from Nigeria. International Journal of Business and Emerging Markets,1(3), 264-281. https://doi.org/10.1504/IJBEM.2009.023446
Sari, R., Soytas, U., (2009). Are global warming and economic growth compatible? Evidence from five OPEC countries? Applied Energy, 86,1887–1893.
Schumpeter, J., (1960): Teoria rozwoju gospodarczego. PWN, Warszawa.
Shan, J., Sun, F., (1998). Export-led growth and the US Economy: Some further testing. Applied Economics Letters, 6, 169‒72.
Stern, N., (1989). The economics of development: a survey. The Economic Journal, 99(397), 597–685. https://doi.org/10.2307/2233764
Toda, H.Y., Yamamoto, T., (1995). Statistical inference in vector autoregressions with possibly integrated processes. Journal of Econometrics, 66, 225–250.
Uzunkaya, M. (2012). Economic Performance in Bank-Based and Market-Based Financial Systems: Do Non-Financial Institutions Matter. Journal of Applied Finance and Banking, 2(5),159-176.
World Bank (2019). World Development Indicators (WDI) database. Retrieved from https://databank.worldbank.org/source/world-development-indicators# on December, 2019.
Wooldridge, J. M.. (2013). Introductory econometrics : a modern approach. 5th Edition. Mason, Ohio :South-Western Cengage Learning.
Zellner, A., (1970). An efficient method of estimating seemingly unrelated regression and tests for aggregate bias. Journal of the American Statistical Association, 57, 348‒368.
Akçay, S., (2011). Causality relationship between total RandD investment and economic growth: Evidence from United States, The Journal of Faculty of Economics and Administrative Sciences, 16(1), 79‒92.
Alimi, R. S., Ofonyelu, C. C., (2013). Toda-Yamamoto Causality Test between Money Market Interest Rate and Expected Inflation: The Fisher Hypothesis Revisited. European Journal of Scientific Research, 9(7), 125-142.
Awokuse, T.O., Yang, J., (2002). The informational role of commodity prices in formulating monetary policy: A reexamination. Working Paper No. - FREC SP02-02, Department of Food and Resource Economics, University of Delaware.
Bangladesh Bank (2020). Bangladesh Historical Economic Data Set, Excel Sheets. retrieve from https://www.bb.org.bd/econdata/ on March, 2020.
Bangladesh Securities and Exchange Commission, Annual Reports 1992-93 to 2018-19. December, 2019, available online at https://sec.gov.bd/home/annual_reports
Beck, T., & Levine, R. (2004). Stock markets, banks and growth: panel evidence. Journal of Banking and Finance, 28(3), 423–442.
Bencivenga, V.R, Smith, B.D., (1991). Financial intermediation and endogenous growth. Review of Economics Studies, 58,195–209. https://doi.org/10.2307/2297964
Chotikapanich, D., Griffiths, W. E., Skeels, C. L., (2001). Sample size requirements for estimation in SUR models, Department of Economics - Working Papers Series 794, The University of Melbourne, 18 pages.
Chu, N., Oxley, L., Carlaw, K., (2005). ICT and causality in the New Zealand, In Kachitvichyanukul, V., Purintrapiban, U., and Utayopas, P. (Eds.), Economy proceedings of the international conference on simulation and modelling.
Chu, L. K., (2020). Financial Structure and Economic Growth Nexus Revisited, Borsa Istanbul Review, 20(1), 24-36. https://doi.org/10.1016/j.bir.2019.08.003.
Demetriades, P.O., Hussein KA (1996). Does financial development cause economic growth? Time-series evidence from 16 countries. Journal Economics Dynamics & Control, 51, 387–411. https://doi.org/10.1016/S0304-3878(96)00421-X
Demirguc-Kunt, A., Levine, R., (1999). Bank-base and Market-base Financial Systems: Cross-Country Comparisons. Policy Research Working Paper 2143, World Bank.
Demirguc-Kunt, A., Levine, R., (2004). Financial Structure and Economic Growth: A Cross-Country Comparison of Banks, Markets, and Development. The MIT Press, London.
Ekins, P., (2000). Economic growth and environmental sustainability-The prospects for green growth, London: Routledge.
Dritsaki, C., (2017). Toda-Yamamoto Causality Test between Inflation and Nominal Interest Rates: Evidence from Three Countries of Europe. International Journal of Economics and Financial Issues, 7(6), 120-129.
Engle, R. F., Granger, C., (1987). Cointegration and Error Correction: Representation, Estimation and Testing. Econometrica, 55(2), 251-276.
Friedman, M., Schwartz, A.J., (1963). Monetary history of the United States, 1867–1960. Princeton University Press, Princeton.
Gambacorta, L., Jing, Y., Tsatsaronis, K., (2014). Financial Structure and Growth. BIS Quarterly Review, Bank for International Settlements, 21-35. https://ssrn.com/abstract=2457106
Giles, J.A., Mirza, S., (1999). Some Pretesting Issues on Testing for Granger non- Causality, Econometrics Working Paper EWP9914, Department of Economics, University of Victoria.
Goldsmith, R.W. (1969). Financial structure and development. Yale University Press, New Haven.
Granger, C. W. J., (1969). Investigating causal relations by econometric models and cross spectral methods, Econometrica, 37, 424- 38.
Greenwood, J., Jovanovic, B., (1990). Financial development, growth, and the distribution of income. Journal Political Economy, 98, 1076–1107.
Greenwood, J., Smith, B. D., (1997). Financial markets in development, and the development of financial markets. Journal of Economic Dynamic Control, 21, 145–181. https://doi.org/10.1016/0165-1889(95)00928-0
Gutierrez, C., Enrique, C., Souza, C., Reinaldo, Teixeira de Carvalho, Guillén, O., (2009). Selection of Optimal Lag Length in Cointegrated VAR Models with Weak Form of Common Cyclical Features. Brazilian Review of Econometrics, 29(1), 59-78.
Hondroyiannis, G., Lolos, S., and Papapetrou, E., (2004). Financial market and economic growth in Greece, 1986-1999. Working Paper No. 17.
International Monetary Fund (2019). International Financial Statistics (IFS) database 2019.
Inusah, N., (2018). Toda-Yamamoto Granger No-causality Analysis of Stock Market Growth and Economic Growth in Ghana. Journal of Accounting, Business and Finance Research, 3(1), 36-46. https://doi.org/10.20448/2002.31.36-46
Johansen S, Juselius K., (1990). Maximum likelihood estimation and inference on cointegration – With applications to the demand for money. Oxford Bulletin of Economics and Statistics, 52(2), 169–210.
Lal, I., Sulaiman, D., Hussain, A., (2009). Effects of Financial Structure and Financial Development on Economic Growth: A Case Study of Pakistan. European Journal of Social Sciences, 11(3), 418-427. https://www.researchgate.net/publication/200503956
La Porta, R., Lopez-de-Silanes, F., Shleifer, A., Vishny, R. W., (1998). Law and Finance. Journal of Political Economy, 106(6), 1113-1155.
Levine, R., (1997). Financial Development and Economic Growth: Views and Agenda. Journal of Economic Literature, 35, 688–726.
Levine, R., (2002). Bank-Based or Market-Based Financial Systems: Which is better, William Davidson Working Paper No. 442.
Lucas, R. E., (1988). On the mechanics of economic development. Journal of Monetary Economics, 22, 3–42.
Luintel, K. B., Khan, M., Leon-Gonzalez, R., Guangjie, L., (2016). Financial Development, Structure and Growth: New Data, Method and Results. Journal of International Financial Markets, Institutions and Money, 43(C), 95-112. https://doi.org/10.1016/j.intfin.2016.04.002
Maduka, C. A., Onwuka, K. O., (2013). Financial market structure and economic growth: Evidence from Nigeria data. Asian Economic and Financial Review, 3(1), 75-98.
McKinnon, R, I. (1973). Money and capital in economic development. Brookings Institution, Washington.
McQuarrie, A. D., (1999). A small-sample correction for the Schwarz SIC model selection criterion. Statistics & Probability Letters, 44(1), 79-86.
Miche, Y., Lendasse, A., (2009). A faster model selection criterion for OP-ELM and OP-KNN: Hannan-Quinn criterion, ESANN'2009 proceedings, European Symposium on Artificial Neural Networks - Advances in Computational Intelligence and Learning. Bruges (Belgium), 22-24 April 2009.
Oh, W., Lee, K., (2004). Causal Relationship between energy consumption and GDP revisited: The case of Korea 1970-1999. Energy Economics, 26, 51‒59.
Oima, D., Ojwang, C., (2013). Market-Based and Bank-Based Financial Structure on Economic Growth in Some Selected ECOWAS Countries. International Journal of Education and Research, 1(2), 1-10.
Olofin, S. O., Afangideh, U. J., (2008). Financial structure and economic growth in Nigeria: A Macroeconometric Approach. Nigerian Journal of Securities and Finance, 13(1), 47-69.
Pesaran, M. H., Shin, Y., Smith, R., (2001). Bound testing approaches to the analysis of level relationship. Journal of Applied Econometrics, 16(3), 174–189.
Pinno, K., Serletis, A., (2007). Financial structure and economic growth: the role of heterogeneity. Applied Financial Economics, 17(14), 1129-1139. https://doi.org/10.1080/09603100600749238
Phumiwasana, T., (2003). Financial Structure, Economic Growth and Stability, Claremont Graduate University, Department of Economics, Ph.D. Dissertation.
Prochniak, M., Wasiak, K., (2017). The impact of the financial system on economic growth in the context of the global crisis: empirical evidence for the EU and OECD countries. Empirica,44, 295–337. https://doi.org/10.1007/s10663-016-9323-9
Puatwoe, J.T., Piabuo, S.M., (2017). Financial sector development and economic growth: evidence from Cameroon. Financial Innovation, 3(25), 1-18. https://doi.org/10.1186/s40854-017-0073-x
Rambaldi, A.N., Doran, H.E., (1996). Testing for Granger non-causality in cointegrated systems made easy, Working paper in econometrics and applied statistics no. 88, University of New England.
Robinson, J., (1952). The generalization of the general theory. In: Robinson, J., (edited) The rate of interest and other essays. Macmillan, London.
Saibu, O. M., Bowale, E. & Akinlo, A. E. (2009). Financial Structure and Economic Growth: Empirical Evidence from Nigeria. International Journal of Business and Emerging Markets,1(3), 264-281. https://doi.org/10.1504/IJBEM.2009.023446
Sari, R., Soytas, U., (2009). Are global warming and economic growth compatible? Evidence from five OPEC countries? Applied Energy, 86,1887–1893.
Schumpeter, J., (1960): Teoria rozwoju gospodarczego. PWN, Warszawa.
Shan, J., Sun, F., (1998). Export-led growth and the US Economy: Some further testing. Applied Economics Letters, 6, 169‒72.
Stern, N., (1989). The economics of development: a survey. The Economic Journal, 99(397), 597–685. https://doi.org/10.2307/2233764
Toda, H.Y., Yamamoto, T., (1995). Statistical inference in vector autoregressions with possibly integrated processes. Journal of Econometrics, 66, 225–250.
Uzunkaya, M. (2012). Economic Performance in Bank-Based and Market-Based Financial Systems: Do Non-Financial Institutions Matter. Journal of Applied Finance and Banking, 2(5),159-176.
World Bank (2019). World Development Indicators (WDI) database. Retrieved from https://databank.worldbank.org/source/world-development-indicators# on December, 2019.
Wooldridge, J. M.. (2013). Introductory econometrics : a modern approach. 5th Edition. Mason, Ohio :South-Western Cengage Learning.
Zellner, A., (1970). An efficient method of estimating seemingly unrelated regression and tests for aggregate bias. Journal of the American Statistical Association, 57, 348‒368.
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2022-05-13
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Causality between Financial Structure and Economic Growth in Bangladesh: A Toda-Yamamoto Approach. (2022). Timisoara Journal of Economics and Business, 14(1), 39-56. https://www.tjeb.ro/index.php/tjeb/article/view/356
