ECONOMIC GROWTH AND FINANCIAL DEVELOPMENT: AN EMPIRICAL ANALYSIS OF MONGOLIAN ECONOMY

Mongolia has been passing through the transitional stage from controlled economic system to liberalized political and economic system during last two decades. The country is still on the early stage of development of market economy but one of the fastest growing economies in the world and especially in Asian region. At a same time, Mongolian financial sector, especially banking sector, is one of the fastest growing industry among the others since its economic and financial reform started. Naturally, it arises the questions whether financial sector development leads to economic growth or otherwise economic growth leads to financial sector development. This paper is the result of an attempt to analyze the causal relationship between financial sector development and economic growth in Mongolia. This empirical analysis is performed using Granger Causality test procedure under Vector Auto Regressive model with quarterly data of economic growth and financial development proxies which dimensioned into financial depth, access, efficiency and stability in 2001-2017. These empirical tests provide an evidence for presence of significant causal relationship from financial development to economic growth in Mongolia. This unidirectional causality can be explained by the result of Mongolian Government policies which have liberalized its financial sector since 1990s. The empirical analysis found that financial indicators causes economic growth in different time horizons. Among the financial deepening indicators, an increase in broad money drives to economic growth in short term while growth in private sector credit and capital market lead to economic growth in long term. Improvement in access to the finance followed by economic growth in short term, while financial sector efficiency causes economic growth in long term. In summary, Mongolian economic growth strongly follows the financial sector development. Therefore, macroeconomic policies to strengthen and stimulate financial sector development are highly recommended.