Causality between the pillars of development and economic growth : a panel VAR application

Abstract

This paper examines the long-term relationship between financial development, social development and economic growth in 15 Asian countries for the period from 1961 to 2012. Using principal component analysis to construct development indices and a panel vector auto-regressive (VAR) model to test Granger causalities, the study identified the presence of bidirectional causality between economic growth and financial development. They predict a country's level of social development. The policy implication of this study is that, in order to maintain sustainable social development in the 15 selected Asian countries, economic policies should recognise differences in the financial development and economic growth of a given country.