Bond Market Development and Economic Growth: Is There a Causal Effect

Abstract

The paper examines the long-run relationship between bond market development and economic growth in 34 selected countries for the period 1993-2011. The statistical methods used in this study are Principal Component Analysis (PCA) and panel vector auto-regressive (VAR) model. The PCA is used to construct the composite index of bond market development, which can project the overall position of bond market in the 34 selected countries. On the other hand, panel VAR model is used to know the casual-nexus between bond market development and economic growth. The panel VAR technique is the application of co-integration and Granger causality analysis on a panel of cross sectional units. The empirical investigations starts with unit root and co-integration check. Using panel unit root test and panel co-integration test, the study finds that bond market development, and economic growth are integrated of order one and they are co-integrated, indicating the existence of long run association between the two. The empirical findings of panel VAR model suggest the existence of bidirectional Granger causality between bond market development and economic growth. The policy implication of this study is that the economic policies should recognize the differences in the bond market-growth nexus in order to maintain sustainable financial development and economic growth in the selected 34 countries.