The IUP Journal of Applied Finance
Is the Financial-Led Growth Hypothesis Valid for Sri Lanka? – An ARDL Bounds Test Approach

Article Details
Pub. Date :April, 2019
Product Name : The IUP Journal of Applied Finance
Product Type : Article
Product Code : IJAF11904
Author Name : Navaratnam Ravinthirakumaran, Wijitapure Wimalaratana and Kalaichelvi Ravinthirakumaran
Availability : YES
Subject/Domain : Finance
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No. of Pages : 20

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Abstract

The financial-led growth hypothesis suggests that the financial development of a country plays a major role in its economic growth. Several channels through which financial development promotes growth in the economy include efficient allocation of capital, mobilization of savings through attractive instruments, lowering of the cost of the information gathering and presenting, among others. Financial development has been a much debated issue among economists and policy makers both in developed and developing countries, including Sri Lanka. This paper empirically examines the validity of the financial-led growth hypothesis in Sri Lanka using time series data from 1966 to 2016. The paper uses the Autoregressive Distributed Lag (ARDL) bounds testing for cointegration developed by Pesaran

et al. (2001). The empirical results confirm the validity of the financial-led growth hypothesis for Sri Lanka.


Description

The financial-led growth hypothesis suggests that the financial development of a country plays a major role in its economic growth. According to World Bank (2001), financial development makes a significant contribution to growth; it is fundamental for poverty alleviation and is associated with immense improvements in income distribution. Although the relationship between financial development and economic growth has been one of the most debated issues in the literature since the pioneering contributions of Schumpeter (1912), Goldsmith (1969), McKinnon (1973), and Shaw (1973), there is no agreement among economists whether financial development causes economic growth or economic growth causes financial development.


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