Investigation of the asymmetric relationship between financial innovation, banking sector development, and economic growth

With this study, we try to explore new insights about the existence of an asymmetric relationship between financial innovation, banking sector development, and economic growth of Asian countries for the period of 1974Q1 to 2016Q4. In this study, we apply Autoregressive Distributed Lag (ARDL) bound testing to capture long-run association and nonlinear Autoregressive Distributed Lagged (NARDL) to capture the existence of an asymmetric relationship between studied variables. ARDL-bound testing confirms long-run cointegration and nonlinear ARDL confirms the existence of an asymmetric relationship between financial innovation, banking sector development and economic growth of Asian countries. For a directional relationship, we perform Granger-causality under error correction model. Study support feedback hypothesis between financial innovation and economic growth and banking sector development and economic growth both in short and long run. The study suggests, the government should encourage financial innovation in the financial system through technological advancement and institutional integration and formulated economic policy favor of banking sector development by allowing institutional development, enterprise risk management and encouraging healthy competition in the financial system.