An analysis of economic stability and financial development in India using asymmetric cointegration and simulative causality tests

Muzffar Hussain Dar and Md Zulquar Nain

The Journal of Economic Asymmetries, 2024, vol. 30, issue C

Abstract: There is consensus among scholars and policymakers alike that economic stability significantly affects the financial sector of an economy. In this context, the present paper explores the possible asymmetric impact of macroeconomic stability on the Indian financial sector for the period 1975–2021. To capture the asymmetry, this study adopts the nonlinear autoregressive distributive lag (NARDL) model. Furthermore, this study examines the asymmetric causal flow between macroeconomic stability and financial development using the new asymmetric causality test proposed by Hatemi-j (2012). The results demonstrate that macroeconomic instability hurts financial development and that this effect is asymmetrical in nature. Furthermore, the findings demonstrate that per capita real income has a positive impact on financial development, supporting the demand-led hypothesis in the finance growth nexus. The results further demonstrate that the causal relationship is asymmetric. There is a unidirectional, asymmetrical causal flow from positive shock in financial development to positive shock in inflation. Overall, we conclude that the benefits of financial sector reforms are contingent upon economic stability. This implies that Indian policymakers must prioritize economic stability over financial reforms, emphasizing that future policy formulation should be contingent on cyclical periods.

Keywords: Financial development; Macroeconomic instability; Asymmetric impact; India (search for similar items in EconPapers)
JEL-codes: E44 O16 O53 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:joecas:v:30:y:2024:i:c:s170349492400032x

DOI: 10.1016/j.jeca.2024.e00383

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