Investigation into the correlation between financial advancement and economic expansion: Evidence from the United Arab Emirates

Abstract

The United Arab Emirates currently has the most successfully diversified economy out of the six countries that are members of the Gulf Cooperation Council. The purpose of this study is to investigate the connection that exists between the financial sector and economic expansion in the UAE (commonly referred as the GCC). For the purposes of this discussion, the years 1975 through 2016 were considered. In light of the fact that this investigation is concerned with time series analysis, a number of methods pertaining to time series were utilized in order to investigate the connection between the financial sector and economic expansion. After determining whether or not the variables were stationary using the Augmented Dickey-Fuller (ADF) unit root test, the next step was to use the lag length criteria test to determine the best possible lag length before moving on to the cointegration test. In the end, the Vector Error Correction Model test (VECM) and the Granger Causality test were used to determine the relationship by employing domestic credit to the private sector, broad money (M2), and FDI as proxy variables to measure financial development, and GDP per capita (constant 2010 US$) as a proxy variable for measuring economic growth. These variables were used to determine the relationship by employing domestic credit to the private sector, broad money (M2), and FDI as proxy variables. The findings of the study showed that broad money and private sector credit play an important part in the growth of the financial sector in the UAE. These findings were obtained from the results that were obtained from the analysis.