Banking sector development and economic growth in ARF countries: the role of stock markets

The paper examines the long-run relationship between banking sector development, stock market development and economic growth in 26 ASEAN regional forum (ARF) countries for the period 1961-2012. Using principal component analysis for the construction of development indices and panel vector auto-regressive model for testing the Granger causalities, the study shows that a long-run relationship between banking sector development, stock market development and economic growth exists in ARF countries. The study also uniquely finds the existence of bidirectional causality between banking sector development and economic growth and a unidirectional causality from stock market development to economic growth. It, however, reveals the existence of unidirectional or bidirectional causal links between banking sector development and stock market development. Hence, future studies on economic growth that exclude the dynamic interrelationship of these variables will be unreliable.