By employing a battery of time series techniques including Autoregressive Distributed Lag (ARDL), Vector Error Correction Model (VECM), Impulse Response Function (IRF) and Variance Decomposition (VDC), the paper empirically assesses the short and long-run finance-growth nexus during the post-1997 financial crisis period in the Philippines. The study discovers a long-run equilibrium among growth, financial depth, investment and price level. Granger causality tests based on VECM further reveal that there is a unidirectional causality running from growth to financial depth; the finding echoes the `growth-led finance hypothesis' or Robinson's (1952) `demand-following view'. The findings suggest that in order to further promote economic growth, priority should be given to long-run economic growth policies rather than financial reform. Economic growth causes financial institutions to change and develop, and banking sector as well as stock market to grow.

Eleven years after a financial turmoil hit the Asian countries, the economy of the Philippines has now virtually recovered. Although the growth rate of the Philippines (5.3%) was lower than the ASEAN average growth rate of 5.8% (International Monetary Fund, 2006) and other larger emerging economies such as India (9.7%) and China (11.6%), it was slightly higher compared to the average growth rate of the world economy of 4% (World Bank, 2006). Why is the economic growth rate of the Philippines different from the other countries? Despite the fact that researchers in the area of economic development have raised this fundamental question since the early 1930s, it is still relevant in the present context of the Philippine economy. Earlier studies on economic growth have suggested that the level of macroeconomic stability, international trade, educational attainment, religious diversity, the effectiveness of legal system, and resource endowments are among the factors contributing to the cross-country differences in growth. The list of liable factors continues to expand, apparently without limit (Khan and Senhadji, 2000). The differences in institutional environment, quality of institutions, judicial system, bureaucracy, law and order, property rights, investment infrastructure between the Philippine economy and the economies of other countries are believed to be among the contributors to cross-country differences in growth.

Of those possible factors contributing to economic growth, the role of financial sector has begun to receive attention more recently. The initial recognition of a significant relationship between financial development and economic growth dates back to Schumpeter (1912). Since then, there have been rigorous studies that have explored whether economic growth affects financial development or otherwise. Earlier studies on growth-finance causation documented a positive relationship between growth and financial development (Schumpeter, 1932; Goldsmith, 1969; McKinnon, 1973; and Shaw, 1973). In another study, Robinson (1952) found that economic growth causes financial sector to grow. Meanwhile, Lucas (1988) documented an independent and non-causal relationship between growth and financial development. On the other hand, Demetrides and Hussein (1996) and Greenwood and Smith (1997) believed that there is a bidirectional causality between growth and financial development.

Financial Economics Journal, Impulse Response Function, Vector Error Correction Model, Financial Reforms, Economic Development, Judicial System, Financial Sectors, Financial Development, Resource Endowments, Financial Liberalization, Gross Domestic Product, Error Correction Term, Economic Implications, Financial Markets.