Financial development and economic growth in Vietnam: a quantitative assessment

Abstract

The thesis employs two quantitative methods to explore the relationship between economic growth and financial development in Vietnam using quarterly data from 1999 to 2012. Firstly, the ARDL cointegration test developed by Pesaran and Shin (1999), and Pesaran, Shin, and Smith (2001) was used to search for a long run relationship among economic growth, financial development, and other macroeconomic variables including exports, imports, inflation, and real interest rate. The existence of such long run cointegration relationship is confirmed through the ARDL bound testing procedure with all four indicators of financial development, namely ratio of M2 to GDP, ratio of deposits to GDP, ratio of credits to GDP, and ratio of credits provided to the private sector to GDP. Secondly, Toda and Yamamoto (1995) causality test was employed to determine the causal relationship between economic growth and financial development under a multivariate VAR framework. Evidence of causality running from financial development to economic growth is found for all indicators of financial development. These results provide strong support to the supply-leading hypothesis on the relationship between economic growth and financial development for the case of Vietnam.