Monotonic relationship between Financial Development and Economic Growth in Iran

pooya sabetfar¹ farideh bakhtiarian²

1) Assistant Professor of Azad University of Qazvin
2) University student of Azad University of Qazvin

IOI Code : XYCH-AECBE
Publication : 3rd International conference on Management , Economics and Humanities(icmeh.org)
Abstract :
    Abstract Economic growth and increase in social welfare is the ultimate goal of all economic systems. Thus, economists have always tried to explain and model the main factors influencing economic growth. This study tries to examine the monotonicity of the relationship between financial development and economic growth in Iran in years from 1965 to 2014. In this regard, principal component analysis is used to create a composite index of common indexes in market and Ordinary Least Square method is used to estimate the model. Empirical results show that both money and capital markets have positive effects on economic growth in Iran and money market’s effect is stronger. It also shows that a nonlinear U shape relation exist between money market development and economic growth. It means that development of money market and economic growth have a positive nonlinear relation in high level of development of these two and in low level developed money market cannot boost economic growth. So the hypothesis of monotonic relation between money market and economic growth is rejected. Empirical results also show that there is a linear relation between capital market development and economic growth. Better performance in capital market can boost total production in economy in all economic situations. Based on results, the hypothesis of existence a nonlinear relationship between capital market development and economic growth will be rejected.

Keywords : financial development capital market money market economic growth monitonicity nonlinear relation ordinary least square