The Dynamic Causality Relationship Among Financial Depth, Savings and Economic Growth

Although many internal and external studies have been undertaken to investigate the relationship between economic growth and financial development, but most of these studies use the bivariate causality test for examining the relationship between these two variables. Due to the omitted variable bias, the results of these studies can face difficulties. Therefore, in this study, we examined the dynamic causality relationship between economic growth and financial depth for Iranian economy, within a trivariate causality model (through importing saving’s intermediate variable) during 1966-2007. In this study, the existence of the long-run relationship between these two variables is examined by using Auto Regressive Distributed Lag Method (ARDL) and Johansen-Juselius co-integration test. Afterwards, the causality relationship between the variables of the model is examined by using Error Correction model and VAR Granger Causality Test. According to the results of this study, existence of the long run Granger causality relationship from financial depth to economic growth is rejected. However, the results confirm that there is a long run Granger causality relationship from economic growth to financial depth. Therefore, the results imply that there is a unidirectional long run Granger causality relationship from economic growth to financial depth.