Abstract
This study aims to examine empirically whether financial development can promote economic growth in Bangladesh. It employs the Autoregressive Distributed Lag (ARDL) model and takes annual data from 1987 to 2019. This study confirms a cointegrating relationship between financial development and economic growth. The nature of this relationship is unidirectional, running from financial development to economic growth. The outcome of the study confirms that financial development, as proxied by private sector loans and broad money supply, augments economic growth in the long-run. As for the control variables, gross domestic savings show an insignificant impact on economic growth when private sector loans are proxied for financial development. However, it confirms a substantial impact on economic growth when broad money supply is proxied for financial development. More interestingly, trade openness, another control variable, suggests an adverse impact on economic growth in the long-run. However, it has a substantial positive influence on economic growth in the short-run. In the short-run, broad money supply at lag 2 and gross domestic savings significantly affect economic growth when broad money supply is proxied for financial development. The findings of this study advocate that a robust and dynamic financial structure in Bangladesh is a critical success factor for developing the country's economic growth.
Highlights
Bangladesh is one of the smallest countries in the world, located in the Indian subcontinent
This study finds that a 1% increase in trade openness in models 1 and 2 decreases gross domestic product (GDP) by 0.1164% and 0.0810%, respectively
Financial development is the independent variable proxied by two key indicators: private sector loans and broad money supply
Summary
Bangladesh is one of the smallest countries in the world, located in the Indian subcontinent. The country achieved independence through a bloody struggle in 1971. Economic reformation and development for the fragile nation was a challenge for the former governments in the post-independence period. Bangladesh has emerged as a role model in the world in a variety of social and economic development areas in a relatively short period of time. According to the World Bank, the GDP growth rate of the country was 8.15%, and the per capita GDP was 1855.74 US dollars in 2019 [1]. Bangladesh, followed by Bhutan, was one of the two countries that achieved nonnegative GDP growth of 5.2% during the COVID-19 pandemic situation in 2020 among the South Asian countries, while the region’s overall GDP shrank by 6%, as reported by the Asian
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