Finance-Growth Nexus: Evidence from Indian Economy using Causality Co-Integration Test based on Error Correction Model

Table of Contents

Chapter 1

Background of Finance-Growth Nexus

Chapter 2

Trends of financial growth and economic development in India

Finance-Growth Nexus: The Indian Experience

Objective of the study

Chapter 3

Literature Review

Chapter 4

Data Description

Chapter 5

Theory, Empirical Model and Methodology

Empirical model specification and estimation technique

Stationarity Test

Cointegration Test

Vector Error Correction Estimate

Granger Causality using Unrestricted VAR

Chapter 6

Results and Interpretations

Stationarity Test

Cointegration Test

Vector Error Correction Estimate

Granger Causality using Unrestricted VAR

Chapter 7

Conclusion

Policy Implication

Limitation and Scope of study

Research Objectives and Themes

This thesis investigates the dynamic causal relationship between financial development and economic growth in India from 1950 to 2007, aiming to determine whether financial growth leads to economic development or vice versa, while accounting for structural reforms.

• Analysis of the finance-growth nexus within the Indian economic context.
• Use of time-series econometric techniques including cointegration and vector error correction models.
• Evaluation of the impact of financial sector reforms post-1991.
• Investigation of causality directions across three distinct periods: pre-reform, post-reform, and the overall period.

Excerpt from the Book

Summary of Chapters

Chapter 1: Provides an introduction to the central debate surrounding the causality between financial growth and economic development in the field of economics.

Chapter 2: Details the economic growth history of India, including the shifts from pre-reform state-controlled models to post-1991 liberalization and the current structure of the Indian financial system.

Chapter 3: Reviews the extensive literature on the dynamic interactions between financial development and economic growth, categorizing existing studies and theories.

Chapter 4: Describes the data set used, including sources from the Reserve Bank of India and IMF, and defines the independent and dependent variables used in the empirical models.

Chapter 5: Outlines the theoretical framework, the empirical model specifications, and the econometric methodology, including unit root, cointegration, and causality tests.

Chapter 6: Presents the empirical findings from the stationarity, cointegration, and Granger causality tests, offering interpretations of the results for different time periods.

Chapter 7: Concludes the study by summarizing the findings, offering policy implications based on the analysis, and acknowledging the limitations of the research.

Keywords

Finance-Growth Nexus, Economic Development, India, Financial Liberalization, Causality, Cointegration, Error Correction Model, GDP, Capital Formation, Banking Sector, Vector Autoregression, Financial Infrastructure, Structural Reforms, Unit Root, Time-Series Analysis

Frequently Asked Questions

What is the primary focus of this thesis?

The thesis focuses on examining the causal relationship between financial development and economic growth within the Indian economy over the period from 1950 to 2007.

What are the central themes discussed in the work?

The central themes include the debate between supply-leading and demand-following financial growth, the impact of economic reforms in India, and the role of financial intermediaries in resource allocation.

What is the core objective of the study?

The objective is to empirically determine the direction of causality between finance and growth in India, specifically investigating whether financial development triggers economic growth or if economic development drives the demand for financial services.

Which scientific methods are employed?

The study utilizes time-series econometric techniques, including Augmented Dickey-Fuller (ADF) and Phillip-Perron unit root tests, Johansen cointegration tests, and Vector Error Correction Models (VECM) to perform Granger causality analysis.

What is covered in the main body of the work?

The main body covers the theoretical background, a review of existing literature, a detailed description of the data, the empirical modeling strategy, and a rigorous analysis of the test results for different economic regimes in India.

How would you characterize this work using keywords?

The work is best characterized by terms such as Finance-Growth Nexus, India, Cointegration, Granger Causality, Economic Development, and Financial Liberalization.

How do the findings differ between the pre-reform and post-reform periods?

The study finds a significant shift in causality after the 1991 reforms, moving from a period where financial indicators had weaker impacts to a post-reform era where a bidirectional relationship or stronger causal links are more evident.

Why did the author include 'capital formation' as a variable?

Capital formation was included as a link variable to capture the dynamic interaction between financial growth and economic development, helping to avoid simultaneity bias in the model.

What policy implications does the author suggest?

The author suggests further financial liberalization, including the reduction of state ownership in banks, strengthening corporate governance, and fostering the development of the corporate bond market to improve financial system efficiency.