Title: Dynamic impact of financial development on economic growth: heterogeneous panel data analysis of island economies

Authors: Kazi Sohag; Abi Bibi Nabilah; Rawshan Ara Begum

Addresses: Institute of Climate Change (IPI), Universiti Kebangsaan Malaysia (UKM), Bangi, 43600 Selangor, Malaysia ' Department of Finance and Accounting, University of Mauritius, Reduit 80837, Mauritius ' Institute of Climate Change (IPI), Universiti Kebangsaan Malaysia (UKM), Bangi, 43600 Selangor, Malaysia

Abstract: The purpose of this study is to find whether there is any significant impact, be it short run or long run, of financial development (FD) on economic growth from nine island economies. Despite the vast researches on the FD and economic growth nexus, little has been known from the perspective of island economies. Therefore, this study has attempted to analyse the dynamic relationship by incorporating both time series and cross-sectional data from the island economies over the period of 30 years (1980 to 2009). This study employed error correction-based pooled mean group (PMG), mean group (MG) and dynamic fixed effect (DFE) model for analysing dynamic heterogeneous panel data. Results from the PMG estimates demonstrate that financial development has a negative short run impact on economic growth. Whilst in the long run, there is a positive and a homogenous effect of financial development on growth across the island economy.

Keywords: financial development; economic growth; island economies; dynamic heterogeneous panels; pooled mean group estimation; PMG; dynamic fixed effect; DFE.

DOI: 10.1504/IJEPEE.2015.068249

International Journal of Economic Policy in Emerging Economies, 2015 Vol.8 No.1, pp.77 - 95

Received: 03 Jan 2014
Accepted: 03 Mar 2014
Published online: 27 Mar 2015 *

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