The Nexus between Financial Development and Economic Growth in Bangladesh
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The relationship between financial development and economic growth has been the subject of increasing attention over the 21st century. This study is basically an econometric analysis of financial development and economic growth in Bangladesh and India involving time series data of real GDP growth rate, domestic credit provided by financial sector, domestic credit to private sector, and broad money supply from 1974 to 2015. This research employs Johansen’s multivariate cointegration procedure to test the long-run relationship, while vector error correction model is used to test the causal relationship between financial development and economic growth. Johansen’s cointegration test reveals the presence of a long-term relationship between financial development and economic growth in Bangladesh. Results of ECM provide the evidence of the bidirectional causal relationship between financial development and economic growth. Thus, right and effective monetary policy is very important to accelerate economic growth as both supply-leading and demand-following hypotheses are effective in Bangladesh.
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