Abstract

The objective of this study is to determine whether a relationship exists between financial development and economic growth in Lebanon. The investigation of this link is carried out within a VECM framework over the period 1972–2012. This study uses the VECM-based Granger-causality test to provide empirical evidence of the causal relationship between financial development and economic growth. The evidence suggests that the credit market is still underdeveloped in this country and its contribution to economic growth is limited owing to a lack of financial depth. Therefore, the focus is on the banking sector to measure the financial development. The findings indicate the presence of a positive relationship between financial development and economic growth in the short run that is accompanied by bidirectional Granger causality between these variables. However this relationship is found to be insignificant in the long run. Moreover, the results indicate that the efficiency of the banking sector has an important role in the Lebanese economic growth.

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