The Effect of Financial Development on Human Capital in Iran

Since financial development can contribute to the development of human capital, this paper examines the effect of financial development on human capital formation in Iran during 1973-2010. Regarding financial development as a multifaceted concept, this article first deals with constructing a multidimensional index, including ratio of M2to GDP, ratio of private debt to banks to GDP, ratio of central bank assets to GDP and the ratio of assets of deposit-accepting banks to GDP, using principal components analysis with SAS. Then, using Auto-Regressive Distributed Lags (ARDL) model, the effect of financial development on human capital is estimated through Microfit 4. The results suggest that financial development has significant positive effect on human capital in the short- and long term, and the magnitude of influence is higher in the long term than short term.