The Nexus between Financial Sector Development and Economic Growth: Evidence from Asian Countries

Abstract

The financial sector plays a pivotal role in driving economic growth, serving as a catalyst for investment, innovation, and resource allocation. To delve into its significance within the context of Asian economies, this study empirically investigates its impact. Specifically, we examine and quantify the long-term relationship between financial development and economic growth across a sample of 12 Asian countries, utilizing data spanning a considerable time frame from 1970 to 2017. To capture this relationship comprehensively, we employ the Panel Autoregressive Distributed Lag (ARDL) model, a robust econometric approach suitable for heterogeneous panel data analysis. Unlike traditional models, Panel ARDL accounts for variations in slope and short-run parameters across countries, allowing for a more nuanced understanding of the relationship. Our findings reveal the presence of a long-term relationship between financial development and national income across the sampled Asian countries. This suggests that the evolution and expansion of the financial sector have significant implications for overall economic performance and growth trajectories in these nations. By shedding light on the dynamics between financial development and economic growth, our study contributes to a deeper understanding of the role played by the financial sector in shaping the economic landscape of Asian countries. These insights hold relevance for policymakers, economists, and stakeholders seeking to foster sustainable and inclusive economic development across the region.