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Journal of Social and Economic Development

, Volume 20, Issue 2, pp 308–326 | Cite as

The causal relationship between financial development and economic growth: an experience with BRICS economies

  • K. Siva Kiran Guptha
  • R. Prabhakar Rao
Research Paper
  • 25 Downloads

Abstract

In recent years, the emerging economies of the world, particularly those of the BRICS countries, have attracted increasing attention for their contribution to the growth of the global economy. These countries have initiated significant reforms within financial institutions and financial markets that are vital to the expansion of the financial sector and thus to the countries’ economic growth. In this context, this study aims to determine whether the development of the financial system in these economies is the cause for their growth. To measure the financial system development, the study constructs three broad-based indices—the financial institution development index, financial market development index, and financial system development index—for each economy using principal component analysis, with the factors of depth, efficiency, and stability of financial institutions and financial markets as variables. In addition, we use the Toda–Yamamoto causality test to conduct this exercise for the period 1996–2016. The results of the study reveal that there is no uniformity in finance and growth causality among the BRICS countries.

Keywords

BRICS Financial system Toda–Yamamoto Granger causality Economic growth 

JEL Classification

C38 G2 O5 

Notes

Acknowledgements

The authors are grateful to the editors and anonymous referee for their valuable suggestions in improving this paper.

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© Institute for Social and Economic Change 2018

Authors and Affiliations

  1. 1.Department of EconomicsSri Sathya Sai Institute of Higher LearningPrasanthi NilayamIndia

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