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An ARDL Bounds Testing Approach to the Relationship between Financial Development and Output Growth in Nepal

Abstract:

This paper examines the relationship between financial development and output growth in Nepal over 42 years of period from mid-July 1975 to 2017 using ARDL bounds testing approach to co-integration. The study uses natural logarithm of per capita real GDP as a proxy of output growth and means removal average of broad money (M2) to GDP ratio and domestic private credit to GDP ratio as a proxy of financial development indicator. The results of ARDL bounds test show that financial development and output growth in Nepal is co-integrated over the study period. The study results demonstrate that financial development in Nepal leads to output growth in the long-run. However, the study fails to detect any impact of financial development on output growth in Nepal over the short-run. Based on longrun results of this study, it can be concluded that development of financial sector in Nepal can stimulate long-run output growth. Thus, considerable efforts should be paid on promoting the development of the financial sector that contributes significantly to achieve long-run output growth.

 

Key Words: Financial Development, Output Growth, Co-integration, ARDL.


 

PYC Nepal Journal of Management, Vol - XI, No. - 1, August - 2018

 
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