Is the Financial-Led Growth Hypothesis Valid for Sri Lanka?-An ARDL Bounds Test Approach

Abstract

The financial-led growth hypothesis suggests that the financial development of a country plays a major role in its economic growth. Several channels through which financial development promotes growth in the economy include efficient allocation of capital, mobilization of savings through attractive instruments, lowering of the cost of the information gathering and presenting, among others. Financial development has been a muchdebated issue among economists and policy makers both in developed and developing countries, including Sri Lanka. This paper empirically examines the validity of the financial-led growth hypothesis in Sri Lanka using time series data from 1966 to 2016. The paper uses the Autoregressive Distributed Lag (ARDL) bounds testing for cointegration developed by Pesaran et al. (2001). The empirical results confirm the validity of the financial-led growth hypothesis for Sri Lanka.