Causal nexus between economic growth, banking sector development, stock market development, and other macroeconomic variables: The case of ASEAN countries

•This study uses banking sector development, stock market development, and macroeconomic variables to investigate the cointegration and Granger causality.•The study combines the different strands of the literature.•We study ASEAN countries over 1961-2012 and employ a panel vector auto-regressive model for detecting the direction of causality between the variables.•Our novel panel data estimation methods allow us to identify the important causal links among the variables, both in the short run and in the long run.

This paper examines the relationship between banking sector development, stock market development, economic growth, and four other macroeconomic variables in ASEAN countries for the period 1961–2012. Using principal component analysis for the construction of the development indices and a panel vector auto-regressive model for testing the Granger causalities, this study finds the presence of both unidirectional and bidirectional causality links between these variables. The study contributes to understanding the importance of the interrelationship between the variables and combines the different strands of the literature. It also contributes to the literature by focusing on a group of countries that have not been studied before. One particular policy recommendation is to make the banking sector more accessible for those country's inhabitants that do not have bank accounts. Another policy recommendation is to nurture stock market development, which will facilitate the increased raising of capital for investment purposes to enhance economic growth.

Graphical abstractNote 1: GDP is per capita economic growth rate; BSD is banking sector development; SMD is stock market development, and MED is macroeconomic development comprised of four macroeconomic variables: FDI, OPE, INF, and GCE.Note 2: FDI: foreign direct investment; OPE: trade openness; INF: inflation rate; and GCE: government consumption expenditure.Note 3:H1A, B: banking sector development Granger-causes economic growth and vice versa.H2A, B: stock market development Granger-causes economic growth and vice versa.H3A, B: a macroeconomic determinant Granger-causes economic growth and vice versa.H4A, B: banking sector development Granger-causes stock market development and vice versa.H5A, B: banking sector development Granger-causes a macroeconomic determinant and vice versa.H6A, B: stock market development Granger-causes a macroeconomic determinant and vice versa.Figure optionsDownload full-size imageDownload as PowerPoint slide