Reexamining the Finance–Growth Relationship for a Developing Economy: A Time Series Analysis of Post-reform India

The cross-country empirical literature on the finance-growth relationship has debated three propositions: (i) financial deepening has a strong impact on the growth process; (ii) measures of financial “activity” rather than the “size” of the sector plays a more significant role in the growth process; and (iii) financial structure (bank-based versus stock market-based) has no impact on the growth process at all. The present study reexamines the validity of these propositions for a developing economy. These propositions are tested for the post-reform Indian economy using the modified Pantula principle associated with the Vector Error Correction Model (VECM) methodology. [IEG Working Paper No. 313]. URL:[http://www.iegindia.org/].