Financial Development and Economic Growth in Bhutan: An ARDL Approach

The relationship between financial development and economic growth has gained much attention in the last three decades. It has been primarily believed that financial sector development promotes economic growth. A lot of theoretical and empirical research has been done in this field and the results which came out are a kind of mixed relationship between the two. Bhutan, a country in the SAARC region has taken different financial reform policies in the same line with other developed and developing countries. The main purpose of this paper is to investigate the relationship between financial development and economic growth in Bhutan. Annual time series data for the period 1990 to 2020 has been taken and the ARDL technique has been used for this purpose. The ARDL bound testing shows that there is a long-run relationship between financial development and economic growth. In the short run, all the proxies of financial development and control variables were found to have a significant relation to economic growth. But the coefficient of the ratio of broad money to GDP is negative, which is not expected. The empirical findings of this study suggested that financial sector development has a positive role in economic growth. Thus, to achieve faster economic growth Bhutan should give importance to the financial sector development.

Keywords

Financial development, Economic growth, ARDL, Broad money

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