Finance growth nexus across Indian states: evidences from panel cointegration and causality tests

Rajesh Sharma and Samaresh Bardhan ()
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Rajesh Sharma: Indian Institute of Technology Ropar
Samaresh Bardhan: Indian Institute of Technology Ropar

Economic Change and Restructuring, 2017, vol. 50, issue 1, No 1, 20 pages

Abstract: Abstract The paper deals with finance-growth relationship across Indian states over 1980–2011 in panel cointegration and causality framework. We apply Engle–Granger two-step procedure for cointegration test in panel setting which takes care of cross-sectional dependence and heterogeneity across states. For panel Granger causality analysis, we employ Dumitrescu and Hurlin (Econ Model 29:1450–1460, 2012) method and apply bootstrapping to account for cross-sectional dependence. We find robust evidence of cointegration between per capita income and credit per capita. Using panel FMOLS, we find that 1 % change in credit per capita results in 0.14 % change in per capita income. Panel Granger causality test reveals that there is bi-directional causality (feedback effects) in the absence of cross-sectional dependence. However, with cross-sectional dependence, we find evidence in favour of supply leading hypothesis. Probable policy implication calls for inclusive financial development and growth strategies in order to mitigate uneven income levels across states.

Keywords: Finance-growth nexus; Panel unit root test; Cross-sectional dependence; Panel Granger no-causality test (search for similar items in EconPapers)
JEL-codes: C10 G21 O16 O40 (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (5)

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DOI: 10.1007/s10644-015-9178-2

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