Author

Rajendra Maharjan

Abstract

This study examines the empirical relationship between financial development and
economic growth in Nepal. Financial development has been measured by three key pillars
of the financial system bank, capital market and insurance. Gross domestic product and
gross fixed capital formation are considered for economic growth indicators. Using time
series techniques, the stationary properties of the data sets are tested followed by Johansen
co-integration test to observe long run equilibrium relationship between the two variables
and Granger Causality test to identify the causal relationship among the variables. Also,
Vector Error Correction Model (VECM) has been employed to analyze the short run
dynamics of the system.
The result of the study reveals that there is cointegrating relationship between market
capitalization and economic development with short-run causality is running from market
capitalization to GDP. In regard to insurance market, error correction term is negative and
significance for both GDP and GCF indicating there is cointegrating relationship between
insurance market and economic development. However, the result shows no evidence of
causality between insurance premium and economic development in short-run. The
negative relation between bank and GDP reinforces that there is a cointegrating
relationship between banking sector development and economic development. The result
also shows that lagged value of GDP is significant. It shows that short-run causality is
running from GDP to banking sector development.