Abstract
This study aims to explore the relationship between economic growth, financial innovation, and stock market development of Bangladesh for the period 1980–2016. To investigate long-run cointegration, this study used the autoregressive distributed lagged (ARDL) bounds testing approach. In addition, the Granger-causality test is used to identify directional causality between research variables under the error correction term. Study findings from the ARDL bound testing approach confirm the existence of a long-run association between financial innovation, stock market development, and economic growth. Furthermore, the findings from the Granger-causality test support bidirectional causality between financial innovation, economic growth and stock market development, and economic growth both in the long run and short run. These findings support the theory that market-based financial development and financial innovation in the financial system can spur economic development.
Highlights
Developmental economic theory emphasizes the efficient mobilization of economic resources in the economy because the optimal mobilization of economic resources transforms national saving into a productive investment, which eventually leads to sustainable economic growth
The mobilization of economic resources immensely depends on the financial intermediation process in the financial sector, which implies that a well-functioning financial sector expedites efficient mobilization of economic resources and plays a fundament role in economic growth as well (Gurley and Shaw 1955)
The efficient Financial system is the outcome of continuous financial innovation, which allows for the emergence of various financial institutions, especially banks, that can offer improved and better financial services with more credit facilities and financial instruments in the economy, which leads to economic growth
Summary
Developmental economic theory emphasizes the efficient mobilization of economic resources in the economy because the optimal mobilization of economic resources transforms national saving into a productive investment, which eventually leads to sustainable economic growth. Financial development can be accelerated by encouraging financial innovation in the economy This is because financial innovation brings changes to the financial system, such as diversified financial services in the banking sector and a reduction of investment risk through the incorporation of financial instruments in the capital market (Handa and Khan 2008; Djoumessi 2009; Simiyu et al 2014). Especially private commercial banks, play a fundamental role in financial progress by innovating various financial goods and services in the financial system These goods and services expedite steady economic growth in the long run. For ensuring long-term capital accessibility, the government implemented initiatives for potential equity issuance, Bangladesh, over the period, experienced steady economic growth of around 6.5% on GDP Such progress is evidence of a concerted effort from every sector of the economy.
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