Does Financial Development and Inflation Spur Economic Growth in Thailand

Abstract

The paper empirically examines the short- and long-run dynamics between financial development, inflation and economic growth during the post-1997 financial crisis in Thailand using battery of time series techniques. Based on the ARDL [2, 2, 0, 0], the study documents a long-run equilibrium between finance depth, inflation and growth. Granger causality tests based on the VECM further reveals that there is a bidirectional causality between finance-growth in Thailand, the finding accords with “the feedback hypothesis” or “bidirectional causality view”. Based on the VDCs and IRFs, the study discovers that the variations in the economic growth rely very much on its own innovations. To promote growth in the country, priority should be given for long run policies, i.e., the enhancement of existing financial institutions both in the banking sector and stock market and the preservation of low rate of inflation.

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