The impact of stock market development and inflation on economic growth in India: evidence using the ARDL bounds testing and VECM approaches

Abstract

This paper investigates the impact of stock market development, money supply and inflation on economic growth in India during the post-globalisation era of the 1990s, especially during the period from 1994 to 2012. Using autoregressive distributive lag (ARDL) bounds testing approach, the study finds stock market development, money supply, inflation and economic growth are cointegrated, suggesting the presence of a long-run equilibrium relationship between them. The vector autoregressive error correction model (VECM) further confirms the existence of both bidirectional and unidirectional causality between economic growth, money supply, inflation and stock market development in India. The policy implication of this study is that inflation and money supply can be considered a policy variable to predict both economic growth and stock market development in the Indian economy during the post globalisation era.