THE RELATIONSHIP BETWEEN FINANCIAL DEVELOPMENT AND ECONOMIC GROWTH AND THE ASIAN FINANCIAL CRISIS: AN FMOLS ANALYSIS

We study the relationship between financial development and economic growth empirically with panel data from five Asian countries, namely, Thailand, Korea, Indonesia, Malaysia and the Philippines over the timeperiod 1989-2006 in the context of the Asian Financial Crisis of 1997. These five countries are believed to be the worst-hit by the 1997 crisis. The period covers nine pre-crisis years, nine post-crisis years and the crisis-year 1997. We examine whether there has been a shift in the structure of the financial sector, that is, the share of financial institutions and financial markets within the financial sector, because of the crisis. We also analyze the effect of the crisis on the causality between financial development and economic growth. We have used the techniques of panel unit root, panel cointegration and Fully Modified Ordinary Least Square (FMOLS) by Pedroni (2000) for heterogeneous cointegrated panel data. We found that the relationship between financial development and growth is not be affected much by the Asian crisis.