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LIST 1399

Measuring the Effect of Financial Development on Economic Growth in Iran: Testing Patrick's Hypotheses

Document Type : ORIGINAL ARTICLE

Authors

1 Master Student in Business Administration, Amirkabir University of Technology, Tehran, Iran.

2 Assistant Professor, Economics and Finance Group, Faculty of Management, Science and Technology, Amirkabir University of Technology, Tehran, Iran.

3 Assistant Professor of Economics, Department of Management and Economics, Faculty of Humanities and Social Sciences, Golestan University, Gorgan, Iran

Abstract

One of the most important issues in macroeconomic management is the analysis of factors affecting economic growth. This research has measured the effect of financial development on Iran's economic growth and test Patrick's hypothesis in the period of 1978-2019. Main research questions include; 1) What variables are effective in Iran's financial development index, together with their weighting factor, and does financial development in Iran bank-oriented or stock market-oriented? 2) What is the short-term and long-term effect of the financial development index on Iran's economic growth and the speed of adjustment to the long-term relationship? 3) Is the causal relationship between Iran's financial development and economic growth demand-oriented or supply-oriented? Firstly, comprehensive financial development index was created by using four variables, including the volume of liquidity, bank credits allocated to the private sector, the value of capital market transactions, and the volume of bank deposits using the Factor Analysis Method. Then the short-term and long-term relationship was calculated using the Autoregressive Distributed Lag (ARDL) model, followed by employing the Granger Causality Test to examine Patrick's hypothesis for the cause-and-effect relationship between financial development and economic growth in Iran. Finally, using the Error Correction Model, the speed of adjustment from the short-run equilibrium to the long-run equilibrium state was evaluated. The results show that the financial development index has a positive relationship with economic growth in the short and long term. Patrick's hypothesis test also confirms only the demand-driven management view which confirms causality from economic growth to financial development.

Keywords

References
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Economic Growth and Development Research
Volume 13, Issue 52
November 2023
Pages 106-93
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  • Receive Date: 20 July 2022
  • Revise Date: 26 August 2022
  • Accept Date: 22 October 2022
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