Financial Development, Savings and Economic Growth: Evidence from Bahrain Using VAR

Abstract

This research paper investigates the linkage between the financial development and the economic growth in Bahrain during the period 1981 to 2013. The motivation for kicking off on the Bahrain economy is attributed on account of paradigm shift manifested in moving from hydrocarbons purveyor to being in the financial services and industrial hub. Given the limiting factor embedded with the bivariate causality structure, the paper encompasses savings as an intermittent variable. The paper makes an earnest investigation to gauge the long run and short run relationship among financial development, savings and the economic growth. Time series data are taken for a time span of 33 years (1981- 2013). Data are culled from the World Bank Database. Financial Development measured by M2(broad money)/ GDP is represented by F, Economic growth measured by GDP per capita is represented by Y and Savings measured by Domestic Savings/GDP is represented by S. No long term co-integration is found among the variables under consideration as represented by Johansen test. Through the employment of multiple econometrics tools under Vector Auto Regression (VAR) framework, it is unearthed that the empirical evidence supports neither the supply –leading hypothesis nor the demand –following hypothesis for the Bahrain. While savings and economic growth have bi-directional causality at 10% level of significance. In responding to inexplicit results between the purported variables, the current study recommends that more wide ranges of reforms in the financial services are entailed, so as to escalate further the economic growth in the Bahrain economy.