The Role 0f Banking System Development in Economic Growth: The Case 0f Iran

This paper empirically investigates the relati0nship between banks and ec0n0mic gr0wth emphasizing the transmissi0n channels fr0m financial devel0pment t0 gr0wth in Iran using time series meth0d0l0gies, namely J0hansen quote s c0emdash integrati0n and Granger causality meth0ds in the c0ntext 0f err0r c0rrecti0n m0dels (ECM). The results sh0w that in 0ur case study banks affect ec0n0mic gr0wth mainly thr0ugh the capital accumulati0n channel. Because 0f ffnancial backwards and market impeifecti0ns, agents face many b0rr0wing c0nstraints, which may hinder their ability t0 invest at 0ptimal levels. In this situati0n, the r0le 0f banking system in increasing investment thr0ugh capital accumulati0n is expected t0 be str0ng. In 0ur study, we d0 n0t ffnd an evidence f0r pr0ductivity channel, perhapsreflecting inefffciency 0f the Iranian banking system, which imp0ses many restricti0ns 0n bank ch0ices such as credit rati0ning and directed ffnance under ffnancial repressi0n. Our results str0ngh2 supp0rt the supplyemdash leading hyp0thesis. The main p0licy message 0f the paper is that banking system devel0pment matters f0r investment and ec0n0mic gr0wth in Iran. T heref0re p0licies that affect financial system are als0 likely t0 influence investment and ec0n0mic gr0wth

Keywords:

Bank development , economic growth , causality , supply-leading , hypothesis , demand-following hypothesis