The impact of financial derivatives markets on economic growth

Abstract

Over the past years, derivatives markets have played a vital role in financial systems and greatly contributed to various aspects of economic growth. A positive contribution of derivatives markets on economic growth in market economy in developing countries is less evident with more recent data. This paper investigates the dynamic relationship between financial derivatives market and economic growth in Indonesia. We used a Granger-Causality test in the framework of vector autoregression (VAR) and impulse response function (IRF) through vector error correction model (VECM) to examine this casual and dynamic relation for the period of 2014Q1 to 2018Q4. Derivatives market had a significant negative effect in the long run on economic growth in Indonesia but had a positive effect in the short term. We also found that response received by economic growth due to derivatives market shock was convergence. It tended to be negatively affected and then changed into positive. The response due to shocks given will eventually disappear so that the shock does not leave a permanent effect.