Income Budgetary Indices and Financial Development-Economic Growth Causal Relationship in Iran

The causal relationship between financial development and economic growth is one of the most challenging topics in the macroeconomic literature. In fact, the relationship between these two key variables depends on the pillars of financial development that can have a significant impact on this relationship. Meanwhile, budget indicators as a representative of macroeconomic stability have a significant impact on the relationship between financial development and economic growth. Therefore, in this paper, the effect of budgetary indicators in the revenue sector on the causal relationship between financial development and economic growth during the period 1978-1397 has been studied. For this purpose, first, the multidimensional index of financial development has been calculated based on the banking indicators approved by the World Bank. Then, based on the bivariate causality test based on the vector error correction model (VECM), the causal relationship between financial development and economic growth has been investigated. Then, the effect of budgetary indicators on the causal relationship between this variable based on the three-variable causality test based on the above model has been done. Based on the results of this study, the main income indicators have a significant effect on the causal relationship between financial development and economic growth. However, major budgetary indicators have prevented macroeconomic stability. This has led to the elimination of the causal relationship between financial sector development and economic growth and the country's economy cannot benefits from developing the financial system in the banking sector to achieve higher economic growth.