A quantitative reassessment of the finance-growth nexus: evidence from a multivariate VAR.

The long-run relationship between financial development and economic growth is examined in a multivariate vector autoregression (VAR) framework using 10 sample countries. Difficulties surrounding the cross-country regressions and bivariate time series studies are outlined. The long-run financial dev elopment and output relationships are identified in a cointegrating framewo rk through tests of over-identifying restrictions, We find bi-directional c ausality between financial development and economic growth in all the sampl e countries, conclusions that stand distinct from tho:se in the existing em pirical literature, We attribute our findings to: (i) analysis of a higher dimensional system, (ii) a new method of identifying the long-run economic relationships, and (iii) a new approach to long-run causality testing. (C) 1999 Elsevier Science B.V. All rights reserved.