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


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.


BRICS Financial system Toda–Yamamoto Granger causality Economic growth 

JEL Classification

C38 G2 O5 



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


  1. Agbetsiaga D (2004) The finance growth nexus: evidence from Sub-Saharan Africa. Sav Dev 28(3):271–288Google Scholar
  2. Ahmed SM, Ansari MI (1998) Financial development and economic growth: the South Asian experience. J Asian Econ 9(3):503–517Google Scholar
  3. Akbas YE (2015) Financial development and economic growth in emerging market: bootstrap panel causality analysis. Theor Appl Econ 3(604):171–186Google Scholar
  4. Akel V, Talip T (2017) Stock market development and economic growth: the case of MSCI emerging market index countries. In: Hacioglu U, Dincer H (eds) Global financial crisis and its ramifications on capital markets. Contributions to economics. Springer, ChamGoogle Scholar
  5. Akinboade OA (1998) Financial development and economic growth in Botswana: a test for causality. Sav Dev 22(3):331–347Google Scholar
  6. Al-Yousif YK (2002) Financial development and economic growth: another look at the evidence from developing countries. Rev Financ Econ 11(2):131–150Google Scholar
  7. Ang JB (2008) Financial development and the FDI-growth nexus: the Malaysian experience. Appl Econ 41(13):1595–1601Google Scholar
  8. Apergis N, Ioannis F, Claire E (2007) Financial deepening and economic growth linkages: a panel data analysis. Rev World Econ 143(1):179–198Google Scholar
  9. Atje R, Jovanovic B (1993) Stock markets and development. Eur Econ Rev 37(2–3):632–640Google Scholar
  10. Bagehot W (1873) Lombard street: a description of the money markets. Wiley Investment Classics, LangportGoogle Scholar
  11. Bekaert G, Campbell RH, Christian L (2001) Emerging equity markets and economic development. J Dev Econ 66(2):465–504Google Scholar
  12. Benhabib J, Spiegel MM (2000) The role of financial development in growth and investment. J Econ Growth 5(4):341–360Google Scholar
  13. Bhattacharya PC, Sivasubramanian MN (2003) Financial Development and Economic growth in India: 1970–71 to 1998–1999. Appl Financ Econ 13(12):925–929Google Scholar
  14. Biswal PC, Kamiah B (2001) On stock market development, banks and economic growth in India. J Soc Econ Dev 3(1):44–56Google Scholar
  15. Bojanic AN (2012) The impact of financial development and trade on the economic growth of Bolivia. J Appl Econ 15(1):51–70Google Scholar
  16. Carneiro de Matos O (2002) Financial development and economic growth in Brazil: causality evidences. Banco Central do Brasil working paper no. 49, pp 1–67Google Scholar
  17. Chakraborty I (2008) Does financial development cause economic growth? The case of India. South Asia Econ J 9(1):109–139Google Scholar
  18. Chakraborty I (2010) Financial development and economic growth in India an analysis of the post-reform period. South Asia Econ J 11(2):287–308Google Scholar
  19. Cheng X, Degryse H (2010) The impact of bank and non-bank financial institutions on local economic growth in China. J Financ Serv Res 37(2):179–199Google Scholar
  20. Choe C, Moosa IA (1999) Financial System and economic growth: the Korean experience. World Dev 27(6):1069–1082Google Scholar
  21. Chow WW, Fung MK (2011) Financial development and growth: a clustering and causality analysis. J Int Trade Econ Dev 35(3):1–24Google Scholar
  22. Chow WW, Fung MK, Leung MK (2018) Finance-growth nexus in China from an endogenous switching perspective. J Int Trade Econ Dev 27(4):443–462Google Scholar
  23. Clement M, Hlalefang K, Nwabisa K, Zizipho M (2018) Financial development and economic growth in Brazil: a non-linear ARDL approach. MPRA working paper no. 85252, pp 1–29. Accessed 2 June 2018
  24. Craigwell R, Downes Darrin (2001) The finance-growth nexus: a multivariate VAR analysis of a small open economy. Sav Dev 25(2):209–233Google Scholar
  25. da Silva MS (2015) Financial and economic development nexus: evidence from Brazilian municipalities. Banco Central Do Brasil working Paper no. 399, pp 1–23.
  26. De Gregorio J, Guidotti PE (1995) Financial Development and economic growth. World Dev 23(3):433–448Google Scholar
  27. Demetriades PO, Luintel KB (1996) Financial Development, economic growth and banking sector controls: evidence from India. Econ J 106(435):359–374Google Scholar
  28. Demetriades PO, Luintel KB (1997) The direct costs of financial repression: evidence from India. Rev Econ Stat 79(2):311–320Google Scholar
  29. Demirguc KA, Levine R (1999) Bank based and market based financial system: cross Country comparison. Policy Research Working Paper no. 2143, pp 1–73. Accessed 4 Apr 2018
  30. Dickey AD, Fuller W (1979) Distribution of the estimators for autoregressive time series with a unit root. J Am Stat Assoc 74(366):427–431Google Scholar
  31. Ductor L, Grechyna D (2015) Financial Development, real sector, and economic growth. Int Rev Econ Finance 37:393–405Google Scholar
  32. Fritz RG (1984) Time series evidence on the causal relationship between financial deepening and economic development. J Econ Dev 9(1):91–111Google Scholar
  33. Fulford S (2013) The effects of financial development in the short and long run: theory and evidence from India. J Dev Econ 104:56–72Google Scholar
  34. Ghali KH (1999) Financial development and economic growth: the Tunisian experience. Rev Dev Econ 3(3):310–322Google Scholar
  35. Goldsmith RW (1969) Financial structure and development. Yale University Press, New HavenGoogle Scholar
  36. Graff M (2002) Causal links between financial activity and economic growth: empirical evidence from a cross-Country analysis 1970–1990. Bull Econ Res 54(2):119–133Google Scholar
  37. Grassa R, Gazdar K (2014) Financial development and economic growth in GCC countries: a comparative study between Islamic and conventional finance. Int J Soc Econ 41(6):493–514Google Scholar
  38. Gupta KL (1984) Finance and economic growth in developing countries. Croom Helm, LondonGoogle Scholar
  39. Handa J, Khan SR (2008) Financial development and economic growth: a symbiotic relationship. Appl Financ Econ 18(13):1033–1049Google Scholar
  40. Hansson P, Jonung L (1997) Finance and economic growth: the case of Sweden 1834-1991. Res Econ 51(3):275–301Google Scholar
  41. Haque ME (2013) Impact of stock market development on economic growth: an evidence from SAARC countries. Int J Res Commer Econ Manag 3(1):15–20Google Scholar
  42. Harris RDF (1997) Stock markets and development: a re-assessment. Eur Econ Rev 41(1):139–146Google Scholar
  43. Hasan I, Wachtel P, Zhou M (2009) Institutional development, financial deepening and economic growth: evidence from China. J Bank Finance 33(1):157–170Google Scholar
  44. Henry PB (2000) Do Stock market liberalizations cause investment booms? J Financ Econ 58(1–2):301–334Google Scholar
  45. Ho SY, Odhiambo MN (2011) Finance and poverty reduction in China: an empirical investigation. Int Bus Econ Res J 10(8):103–114Google Scholar
  46. Jagadish PB (2018) Financial development and economic growth: evidence from a panel of 16 African and non-African low-income countries. Cogent Econ Finance 6(1):1–17Google Scholar
  47. Jalil A, Feridun M (2010) Finance-growth nexus in China revisited: new evidence from principal components and ARDL bounds tests. Int Rev Econ Finance 19(2):189–195Google Scholar
  48. Jalilian H, Kirkpatrick C (2002) Financial development and poverty reduction in developing countries. Int J Finance Econ 7(2):97–108Google Scholar
  49. Johnson RA, Wichern DW (1999) Applied multivariate statistical analysis. Prentice-Hall, Upper Saddle RiverGoogle Scholar
  50. Joshi S (2016) Financial sector development and economic growth in India: some reflections. MPRA paper no. 81201, pp 1–28. Accessed 15 Mar 2018
  51. Jun S (2012) Financial development and output growth: a panel study for Asian Countries. J East Asian Econ Integr 16(1):97–115Google Scholar
  52. Jung WS (1986) Financial development and economic growth: international evidence. Econ Dev Cult Change 34(2):336–346Google Scholar
  53. Kar M, Saban N, Agir H (2011) Financial development and economic growth nexus in the MENA countries: bootstrap panel Granger causality analysis. Econ Model 28(1–2):685–693Google Scholar
  54. Khan MS, AS Senhadji (2000) Financial development and economic growth: an overview. IMF working paper no. WP/00/209, pp 1–24Google Scholar
  55. King RG, Levine R (1993a) Finance and growth: schumpeter might be right. Q J Econ 108(3):717–737Google Scholar
  56. King RG, Levine R (1993b) Finance, entrepreneurship, and growth: theory and evidence. J Monet Econ 32(3):513–542Google Scholar
  57. Lebe F (2016) Financial development and economic growth in European countries: bootstrap causality analysis. J Glob Anal 6(1):47–70Google Scholar
  58. Levine R (1991) Stock markets, growth, and tax policy. J Finance 46(4):1445–1465Google Scholar
  59. Levine R (1997) Financial development and economic growth: views and agenda. J Econ Lit 35(20):688–726Google Scholar
  60. Levine R (1999) Law, finance, and economic growth. J Financ Intermed 8(1–2):8–35Google Scholar
  61. Levine R (2002) Bank-based or market-based financial systems: which is better? J Financ Intermed 11(4):398–428Google Scholar
  62. Levine R, Zervos S (1996) Stock market development and long-run growth. World Bank Econ Rev 10(2):323–339Google Scholar
  63. Levine R, Zervos S (1998) Stock markets, banks and economic growth. Am Econ Rev 88(3):537–558Google Scholar
  64. Liang Q, Teng J (2006) Financial development and economic growth: evidence from China. China Econ Rev 17(4):395–411Google Scholar
  65. Liu X, Sinclair P (2008) Does the linkage between stock market performance and economic growth vary across greater China. Appl Econ Lett 15(7):505–508Google Scholar
  66. Lucas R (1988) On the mechanics of economic development. J Monet Econ 22(1):3–42Google Scholar
  67. Luintel KB, Khan M, Arestis P, Theodoridis K (2008) Financial structure and economic growth. J Dev Econ 86(1):181–200Google Scholar
  68. Majid MSA (2008) Does financial development matter for economic growth in Malaysia? An ARDL bound testing approach. J Econ Cooper 29(1):61–82Google Scholar
  69. Mariusz P, Wasiak K (2016) The impact of the financial system on economic growth in the context of the global crisis: empirical evidence for the EU and OECD countries. Empirica 44(2):295–337Google Scholar
  70. Marques LM, Fuinhas JA, Marques AC (2013) Does the Stock market cause economic growth? Portuguese evidence of economic regime change. Econ Model 32:316–324Google Scholar
  71. McCaig B, Stengos T (2005) Financial Intermediation and growth: some robustness results. Econ Lett 88(3):306–312Google Scholar
  72. McKinnon RI (1973) Money and capital in economic development. Brookings Institution, WashingtonGoogle Scholar
  73. Menyah K, Nazlioglu S, Wolde-Rufael Y (2014) Financial development, trade openness and economic growth in African countries: new insights from a panel causality approach. Econ Model 37(2):386–394Google Scholar
  74. Mercan M, Ismet G (2013) The effect of financial development on economic growth in BRIC-T countries: panel data analysis. J Econ Soc Stud 3(1):199–218Google Scholar
  75. Mhadhbi K (2014) Relationship between financial development and economic growth: a new approach by inputs. J Empir Stud 1(2):62–84Google Scholar
  76. Naceur SB, Ghazouani S (2007) Stock markets, banks, and economic growth: empirical evidence from the MENA region. Res Int Bus Finance 21(2):297–315Google Scholar
  77. Nain Md, Kamaiah B (2014) Financial development and Economic growth in India: some evidence from non-linear causality analysis. Econ Change Restruct 47(4):299–319Google Scholar
  78. Nazmi N (2005) Deregulation, financial deepening and economic growth: the case of Latin America. Q Rev Econ Finance 45(2–3):447–459Google Scholar
  79. Nyasha S, Odhiambo NM (2017) Bank versus stock market development in Brazil: an ARDL bounds testing approach. South East Eur J Econ Bus 12(1):7–21Google Scholar
  80. O'Neill J (2001) Building better global economic BRICs. Goldman Sachs Global Economics Paper No: 66, pp 1–16. Accessed 10 Apr 2018
  81. Oana P, Kasper R (2015) Finance and growth: time series evidence on causality. J Financ Stab 19:105–118Google Scholar
  82. Odedokun MO (1996a) Alternative econometric approaches for analyzing the role of the financial sector in economic growth: time-series evidence from LDC. J Dev Econ 50(1):119–146Google Scholar
  83. Odedokun MO (1996b) Financial policy and efficiency of resource utilization in developing countries. Growth Change 27(3):269–297Google Scholar
  84. Odhiambo NM (2004) Is financial development still a spur to economic growth? A causal evidence from South Africa. Sav Dev 28(1):47–62Google Scholar
  85. Odhiambo NM (2010) Finance-investment-growth nexus in South Africa: an ARDL bounds testing procedure. Econ Change Restruct 43(3):205–219Google Scholar
  86. Ono S (2012) Financial development and economic growth: evidence from Russia. Europe-Asia Stud 2(64):247–256Google Scholar
  87. Ono S (2017) Financial development and economic growth nexus in Russia. Russ J Econ 3(3):321–332Google Scholar
  88. Pagano M (1993) Financial markets and growth: an overview. Eur Econ Rev 37(2–3):613–622Google Scholar
  89. Pan L, Mishra V (2018) Stock market development and economic growth: empirical evidence from China. Econ Model 68:661–673Google Scholar
  90. Panopoulou E (2009) Financial variables and Euro area growth: a non-parametric causality analysis. Econ Model 26(6):1414–1419Google Scholar
  91. Paramati SR, Gupta R (2011) An empirical analysis of stock market performance and economic growth: evidence from India. Int Res J Finance Econ 73:13–149Google Scholar
  92. Patrick HT (1966) Financial development and economic growth in underdeveloped countries. Econ Dev Cult Change 14(2):174–189Google Scholar
  93. Phillips PCB, Perron P (1988) Testing for a unit root in time series regression. Biometrika 75(2):335–346Google Scholar
  94. Pradhan RP, Mukhopadyay B, Gunashekar A, Samadhan B (2013a) Financial Development. Social development, and economic growth: the causal nexus in Asia. Decision 40(1–2):69–83Google Scholar
  95. Pradhan RP, Dasgupta P, Samadhan B (2013b) Finance development and economic growth in BRICS: a panel data analysis. J Quant Econ 11(1–2):308–322Google Scholar
  96. Pradhan RP, Arvin MB, Hall JH, Bahmani S (2014) Causal nexus between economic growth, banking sector development, stock market development, and other macroeconomic variables: the case of ASEAN countries. Rev Financ Econ 23(4):155–173Google Scholar
  97. Ram R (1999) Financial development and economic growth: additional evidence. J Dev Stud 35(4):164–174Google Scholar
  98. Robinson J (1952) The generalization of the general theory. In: The rate of interest and other essays (vol 1, Part A). Macmillan, LondonGoogle Scholar
  99. Sahoo S (2014) Financial intermediation and growth: bank- based versus market-based systems. J Appl Econ Res 8(2):93–114Google Scholar
  100. Satyanarayana Murthy D, Amresh S (2014) Assessing financial development in India and its relation with economic growth: an empirical analysis. J Econ Financ Model 2(1):1–12Google Scholar
  101. Satyanarayana Murthy D, Patra SK, Amaresh S (2014) Trade openness, financial development index and economic growth: evidence from India (1971–2012). J Financ Econ Policy 6(4):362–375Google Scholar
  102. Schumpeter JA (1911) The theory of economic development. Harvard University Press, CambridgeGoogle Scholar
  103. Sehrawat M, Giri AK (2015) Financial development and economic growth: empirical evidence from India. Stud Econ Finance 32(3):340–356Google Scholar
  104. Sehrawat M, Giri AK (2016) Financial development and poverty reduction in India: an empirical investigation. Int J Soc Econ 43(2):106–122Google Scholar
  105. Sehrawat M, Giri AK (2017) Financial structure, interest rate, trade openness and growth: time series analysis of Indian economy. Glob Bus Rev 18(5):1278–1290Google Scholar
  106. Shaw ES (1973) Financial deepening in economic development. Oxford University Press, New YorkGoogle Scholar
  107. Singh A (1997) Financial liberalization, stock markets and economic development. Econ J 107(442):771–782Google Scholar
  108. Singh T (2008) Financial development and economic growth nexus: a time series evidence from India. Appl Econ 40(12):1615–1627Google Scholar
  109. Siva Kiran Guptha K, Prabhakar Rao R (2011) Stock market and economic growth: an empirical analysis for India. Gavesana J Manag 3(2):54–61Google Scholar
  110. Siva Kiran Guptha K, Prabhakar Rao R (2014) An empirical; analysis of stock markets and economic growth after liberalization in India. Finance India 28(2):499–506Google Scholar
  111. Srinivasan P (2014) Stock market development and economic growth in India: an empirical analysis. MPRA paper no. 55657, pp 1–21. Accessed 20 Mar 2018
  112. Stefani P (2007) Financial development and economic growth in Brazil: 1986–2006. Econ Bull 3(69):1–13Google Scholar
  113. Stern N (1989) The economics of development: a survey. Econ J 99(397):597–685Google Scholar
  114. Suleiman AB, Aamer S (2008) Financial development and economic growth: empirical evidence from six MENA countries. Rev Dev Econ 12(4):803–817Google Scholar
  115. Sunde T (2012) Financial sector development and economic growth nexus in South Africa. Int J Monet Econ Finance 5(1):64–75Google Scholar
  116. Svirydzenka K (2016) Introducing a new broad-based index of financial development. IMF working paper no.WP/16/5, pp 1–43. Accessed 15 Jan 2018
  117. Thornton J (1994) Financial deepening and economic growth: evidence from Asian economies. Sav Dev 18(1):41–51Google Scholar
  118. Toda HY, Yamamoto T (1995) Statistical inference in VARs with possibly integrated processes. J Econom 66:225–250Google Scholar
  119. Tripathy S, Pradhan RP (2014) Banking sector development and economic growth in India. Glob Bus Rev 15(4):767–776Google Scholar
  120. Unalmis D (2002) The causality between financial development and economic growth: the case of Turkey. Research and Monetary Policy Department, Central Bank of the Republic of Turkey. Working Paper no. 3, pp 1–12Google Scholar
  121. Wait C, Ruzive T, Roux P (2017) The influence of financial market development on economic growth in BRICS countries. Int J Manag Econ 53(1):7–24Google Scholar
  122. Xu Z (2000) Financial development, investment, and economic growth. Econ Inq 38(2):331–344Google Scholar
  123. Xu H (2016) Financial Intermediation and economic growth in China: new evidence from panel data. Emerg Mark Finance Trade 52(3):724–732Google Scholar
  124. Yu JS, Hassan MK, Sanchex B (2012) A re-examination of financial development, stock markets development and economic growth. Appl Econ 44(27):3479–3489Google Scholar
  125. Zhang J, Wang L, Wang S (2012) Financial development and economic growth: recent evidence from China. J Comp Econ 40(3):393–412Google Scholar

Copyright information

© Institute for Social and Economic Change 2018

Authors and Affiliations

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

Personalised recommendations