Development of Financial Markets and Economic Growth

Financial markets play a vital role in supplying and facilitating the flow of funds into production and industry sectors of economy and can result into the acceleration of economic growth. Indeed, many experts believe that the development of financial markets acts as the engine for growth. The main objective of this paper is analyzing the relationships between financial market development and economic growth through focusing on Iranian economy and thirteen other countries for the period 1988-2003. In this regard in addition to the Beck and Levin model (2003), we have used three versions of Granger–Casualty approach, Cointegartion test and panel data estimation procedure. Casualty test shows that in Iran, bank and stock market size have no strong effect on economic growth despite the fact that the effect of economic growth on stock market is positive and meaningful. The results of panel data estimation revealed that in real terms, investment and labor force, positively and strongly affect economic growth. In the money sector, the effects of banking system are statistically acceptable, although the positive effect of stock market is not statistically acceptable. The absence of Long–run co integration relation between financial markets and economic growth for the period 1976-2003 is the result of Auto-Regressive Distributed Lag Estimation. In sum, the long – run relation between money market and economic growth is negative and this true for the Iranian economy.