Financial Deepening Parameters and Economic Progress in Bangladesh: A Causality and Impact Analysis

Abstract

This research investigated the causality and impact analysis of financial deepening and economic growth in Bangladesh for the period of 1993 to 2020. The Johansen cointegration test is used to demonstrate a long-run association. The Granger causality test and the Error Correction Model are also used to determine causality between the variables and short-term or long-term kinematics among the parameters. The findings show that economic growth, broad money supply, market capitalization, and private sector credit have a long-run relationship with a strong adjustment rate toward long-run equilibrium. The findings also show that whereas broad money has a negative and negligible impact on economic growth, market capitalization has a negative and large impact. Broad money is thought to drive growth from a prior standpoint. However, the analysis found that broad money had no positive impact on economic development between 1993 and 2020. Following a pairwise Granger Causality test, it is discovered that GDP doesn't have an effect on money supply or private sector credit, and vice versa. Based on the findings, the research recommends implementing private sector-friendly policies to ensure that depositors not only have access to credit, but that credit is also available at a reasonable cost, i.e., at a low interest rate.