Relationship between financial and real sectors: implications for stable economic development [evidence from Thailand]

Abstract

Economic real sector is essential for growth and development as its activities persuade progress of economic output. The sector generates better outcomes if it is accompanied with a healthier financial system; thus, advancement of financial sector is a means for the growth of real sector. This study reexamine the relationship between financial and real sectors of Thailand with the volatility analysis of GDP caused by development of financial market. The GARCH Model, Johansen-Juselius (1990) cointegration test, and vector error correction model (VECM) approach were employed on time series data over the first quarter of year 1993 until the second quarter of year 2017. Consistent with past studies, both the elements of capital market (i.e. bonds and stock markets) and the money market (i.e. credit to private sector by banks) bear a positive relationship to the GDP. Our results show that both markets help promoting economic growth. We can infer that differences in financial market composition and institutions do matter, as these three major sections – bond market, stock market, and banks– do not simultaneously develop and grow, but at a different level of their growth paths they complement each other. Our findings suggest that there exists interdependency between real sector and financial sector which in turn enlightens the effect of financial market development on the GDP growth.