A simultaneous equations model of finance and growth: FIML estimates for India

B. Rao and Artur Tamazian

Applied Economics, 2011, vol. 43, issue 25, 3699-3708

Abstract: In the relationship between economic growth and financial development, it is generally conceded that both variables are likely to be interdependent. However, no attempt has been made so far to estimate a simultaneous equations model to test whether finance causes growth or vice versa. This article uses the Full Information Maximum Likelihood (FIML) method to estimate a two equations model of growth and finance for India to determine the strength of this interdependence. Our results show that Financial Developments (FD) have a small but significant permanent growth effect. However, there is no evidence to support the view that 'where enterprise leads, finance follows'.

Date: 2011
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DOI: 10.1080/00036841003689747

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