Abstract

The linkage between financial development indicators and output growth is a debatable issue. However, it is believed that financial development is essential for maintaining a high rate of economic growth. This paper explores the dynamic relationship between financial development and economic growth, using time series data from Saudi Arabia over the period 1970 to 2008. Unlike the majority of previous studies, we employ the ARDL bounds testing approach proposed by Pesaran et al. (2001). Also Granger causality tests were performed within a VECM framework. Three indicators are selected to represent financial development, namely credit to private sector as a ratio of nominal GDP, bank deposit liabilities as a ratio of GDP, and financial savings as a ratio of GDP. The results of the ARDL bounds test indicate that a long-run relationship among the variables exists, where economic growth is found to be significantly influenced by financial development indicators. In addition, Granger causality test shows that developing countries have a supply-leading causality pattern of development rather than a demand-following one.

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