The Role of Capital Market in Economic Development: An Evidence of Ardl -Ecm Approach

Abstract

Purpose: This study investigates the short- and medium-term interactions between financial markets, inflation, and economic growth, aiming to identify the channels through which financial variables influence real economic activity.
Methods: Using weekly data from 2010 to 2023, we employ vector autoregression (VAR) and autoregressive distributed lag (ARDL) models to analyze the dynamic effects of stock market capitalization (SMC), stock market turnover (SMT), government bond prices (GBP), government bond yields (GBY), and inflation (INFLA) on GDP. The models capture both short-run dynamics and long-run relationships, with lags selected to account for delayed adjustment processes.
Results: GDP exhibits strong persistence, with lagged output consistently exerting a positive effect. Equity market variables (SMC and SMT) positively influence GDP in the short run, whereas bond market indicators (GBP and GBY) show negligible effects. Inflation negatively impacts GDP contemporaneously, with partial adjustment in the subsequent period. The error correction mechanism indicates slow but stable convergence toward long-run equilibrium.
Implications: The findings highlight equity markets as the primary channel affecting short-term growth, while bond markets play a minor role. Inflationary pressures impose temporary but meaningful drag on output, underscoring the importance of price stability. Policymakers and regulators should prioritize equity market development and sustained macroeconomic stability to support both short- and long-term economic growth.