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A model of growth and finance: FIML estimates for India

By B. Bhaskara Rao and Artur Tamazian

Abstract

Many empirical works addressed the nature of the relationship between economic growth and financial developments. Although these studies concede that they are interdependent, they have used single equations methods for estimation. In particular in the country specific studies the Granger causality tests are applied to equations estimated with the single equations methods to determine whether financial developments cause growth or vice versa. This paper uses the full information maximum likelihood method to estimate a two equations model of growth and finance for India. We also argue that in virtually all these empirical works the specification of the output equation is unsatisfactory. Our results with the Indian data show that there is no evidence to support the view that finance follows where enterprise goes. Furthermore, financial developments have a small but significant permanent growth effect in India.

Topics: C32 - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models, O11 - Macroeconomic Analyses of Economic Development, O16 - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance, E44 - Financial Markets and the Macroeconomy
Year: 2008
DOI identifier: 10.1080/00036841003689747
OAI identifier: oai:mpra.ub.uni-muenchen.de:8763

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