Assessing the Contributing Role of Financial Development Indicators in Nepalese Economic Growth

Pitambar Lamichhane, Bashu Dev Dhungel, Purna Man Shrestha

Abstract

The purpose of this research is to examine the impact of financial development indicators, broad money supply, bank liabilities and bank credit to the private sector on economic growth. This study assesses the causal relationship between financial development (FD) indicators and economic growth in Nepal.
Methodology: This study applies a descriptive and causality research design for investigating the nexus between FD and the economic growth rate (GDP). The GDP growth rate is used as a dependent variable and FD indicators broad money supply to GDP, bank credit to private sector to GDP and total bank liabilities to GDP are considered as explanatory variables. This research uses Johansen cointegration, Granger causality, and vector error correction models for assessing both the short-run and long-run causal relationship between FD indicators and economic growth in Nepal.
Main Findings: The Johansen cointegration test reveals long-run cointegration among the variables. In addition, the Granger causality test confirms the bi-directional causality between FD indicators and economic growth in Nepal. Finally, the result of the vector error correction term represents a significant level of short-term alteration toward long-term stability, which concludes both short- and stable long-run contributing role of financial development indicators in economic growth.
Applications: The focus of financial development for economic growth is a national priority of Nepal and is of great interest to researchers.
Novelty/Originality: The examination of the causal relationship between financial development and economic growth is the novelty of this study in the context of Nepal. Therefore, policy makers are suggested to formulate and implement various policies to develop a strong financial system for rapid economic growth in Nepal.

 

Keywords: Bank credit to the private sector, bank liabilities, broad money supply, economic growth, financial development.

 

DOI: https://doi.org/10.55463/hkjss.issn.1021-3619.65.2


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