Banking Sector Development, Inflation and Economic Growth in Asian Countries: A Panel Causality and Co-Integration Approach

Abstract

This study investigates the causal relationship between banking sector development, inflation, and economic growth for six Asian countries (Bangladesh, China, India, Malaysia, Pakistan and Sri Lanka) over the period of 1970-2016. Using a Pedroni panel, Kao co-integration test, Panel Granger causality-based Error Correction Model, Dynamic ordinary least square (DOLS), and Fully modified ordinary least square (FMOLS), this study finds that the development of the banking sector generally has a positive relationship with economic growth in the long-run. This results show that in the long-run, monetary policy play a vital role in the economic growth. This study also confirmed the response causality between the indicators of banking sector development and economic growth. Based on the empirical findings, this research provides important policy implications to the banking sector and economic supervisory bodies in order to achieve the long run economic growth.