Financial intermediaries as a growth catalyst: A time-series analysis of Nepal using the Cobb–Douglas function framework

Yadav Mani Upadhyaya; Shiva Raj Ghimire; Prem Bahadur Budhathoki

doi:10.51867/ajernet.7.1.80

Authors

Yadav Mani Upadhyaya Tribhuvan University, Nepal https://orcid.org/0000-0003-3089-3615
Shiva Raj Ghimire Tribhuvan University, Nepal https://orcid.org/0009-0002-7952-1097
Prem Bahadur Budhathoki Tribhuvan University, Nepal https://orcid.org/0000-0002-1249-7005

DOI:

https://doi.org/10.51867/ajernet.7.1.80

Keywords:

Cobb-Douglas Production Function, Economic Growth, Financial Development, Nepal

Abstract

This study examines the impact of financial development (FDS) on economic growth (ECOG) in Nepal, utilizing the Cobb-Douglas production function (CDPF). This study examines the key factors, including domestic credit (DCR), capital formation (CFR), exports, and population growth (POP), to assess their long- and short-term impacts on ECOG. This study utilizes secondary data for the period from 1992 to 2023. It employs the Autoregressive Distributed Lag (ARDL) bounds testing approach to investigate long-term relationships and short-term dynamics among the aforementioned study variables. The results show that DCR—a proxy of FDS—has a favorable effect on GDP in the long run, suggesting that DCR impacts ECOG. However, DCR does not impact ECOG in the short run. The results showed that CFR and exports have an influence on ECOG in both the short and long term. In contrast, the results showed that POP does not affect ECOG in either the short or long term. Annually, approximately 41 percent of deviations from long-term equilibrium are corrected. Results indicate that FDS, CFR, and exports are crucial for Nepalese ECOG. Policymakers should develop policies that increase capital investment, encourage export growth, and alleviate barriers to FDS, thereby fostering sustainable ECOG in Nepal.

Downloads

Download data is not yet available.

References

Abendin, S., & Duan, P. (2021). International trade and economic growth in Africa: The role of the digital economy. Cogent Economics & Finance, 9(1), 1-25. https://doi.org/10.1080/23322039.2021.1911767

Ahmed, F., Kousar, S., Pervaiz, A., & Shabbir, A. (2022). Do institutional quality and financial development affect sustainable economic growth? Evidence from South Asian countries. Borsa Istanbul Review, 22(1), 189-196. https://doi.org/10.1016/j.bir.2021.03.005

Arvin, M. B., Pradhan, R. P., & Nair, M. (2021). Uncovering interlinks among ICT connectivity and penetration, trade openness, foreign direct investment, and economic growth: The case of the G-20 countries. Telematics and Informatics, 60, 101567. https://doi.org/10.1016/j.tele.2021.101567

Asteriou, D., & Spanos, K. (2019). The relationship between financial development and economic growth during the recent crisis: Evidence from the EU. Finance Research Letters, 28, 238-245. https://doi.org/10.1016/j.frl.2018.05.011

Ayanaw Alemu, T., & Belay Zegeye, M. (2024). Empirical investigation on the dynamic effects of population and economic growth in Ethiopia: An application of the VEC model. Cogent Social Sciences, 10(1), 1-23. https://doi.org/10.1080/23311886.2024.2338861

Aziz, T., Khan, M. G. U., Islam, M. T., & Pradhan, M. A. H. (2022). An analysis of the relationship between ICT, financial development, and economic growth: Evidence from Asian developing countries. The Journal of International Trade & Economic Development, 32(5), 705-721. https://doi.org/10.1080/09638199.2022.2134912

Cobb, C. W., & Douglas, P. H. (1928). A theory of production. American Economic Review, 18(1), 139-165

Colther, C., & Doussoulin, J. P. (2025). Recent applications and developments of the Cobb-Douglas function: From productivity to sustainability. Journal of the Knowledge Economy, 16(1), 1646-1666. https://doi.org/10.1007/s13132-024-02061-1

Coulibaly, D. (2018). The impact of financial development on economic growth as countries develop financially and economically: WAEMU countries case. Applied Economics and Finance, 5(5), 83-92. https://doi.org/10.11114/aef.v5i5.3588

Dahal, A. K., Bhattarai, G., Budhathoki, P. B., & Adhikari, G. M. (2024). Bridging prosperity: Unravelling the interplay of public borrowing, gross capital formation, and economic growth in the Nepalese economy. Financial Internet Quarterly, 20(4), 16-31. https://doi.org/10.2478/fiqf-2024-0024

Dahmani, M., Mabrouki, M., & Ben Youssef, A. (2022). ICT, trade openness and economic growth in Tunisia: What is going wrong? Economic Change and Restructuring, 55(4), 2317-2336. https://doi.org/10.1007/s10644-022-09388-2

Dickey, D. A., & Fuller, W. A. (1979). Distribution of the estimators for autoregressive time series with a unit root. Journal of the American Statistical Association, 74(366), 427-431. https://doi.org/10.1080/01621459.1979.10482531

Engle, R. F., & Granger, C. W. J. (1987). Co-integration and error correction: Representation, estimation, and testing. Econometrica, 55(2), 251-276. https://doi.org/10.2307/1913236

Gajurel, R. (2023). Economic growth, public expenditure, and infrastructure on provincial financial development of Nepal. Quest Journal of Management and Social Sciences, 5(2), 302-315. https://doi.org/10.3126/qjmss.v5i2.60928

Ghosh, S. (2019). Foreign direct investment, female education, capital formation, and economic growth in Japan and South Korea. International Economic Journal, 33(3), 509-536. https://doi.org/10.1080/10168737.2019.1600155

Gizaw, T., Getachew, Z., & Mancha, M. (2024). Financial development and economic growth: Evidence from emerging African and Asian countries. Cogent Economics & Finance, 12(1), 2398213. https://doi.org/10.1080/23322039.2024.2398213

Granger, C. W. J. (1981). Some properties of time series data and their use in econometric model specification. Journal of Econometrics, 16(1), 121-130. https://doi.org/10.1016/0304-4076(81)90079-8

Guru, B. K., & Yadav, I. S. (2019). Financial development and economic growth: Panel evidence from BRICS. Journal of Economics, Finance and Administrative Science, 24(47), 113-126. https://doi.org/10.1108/JEFAS-12-2017-0125

Huang, T. H., & Xie, Z. (2013). Population and economic growth: A simultaneous equation perspective. Applied Economics, 45(27), 3820-3826. https://doi.org/10.1080/00036846.2012.734596

Hussain, S., Rehman, A. U., Ullah, S., Waheed, A., & Hassan, S. (2024). Financial inclusion and economic growth: Comparative panel evidence from developed and developing Asian countries. SAGE Open, 14(1). https://doi.org/10.1177/21582440241232585

Mamun, S. A. K., Rahman, M. M., & Khanam, R. (2020). The relation between an ageing population and economic growth in Bangladesh: Evidence from an endogenous growth model. Economic Analysis and Policy, 66, 14-25. https://doi.org/10.1016/j.eap.2020.02.001

Murari, K. (2017). Financial development-economic growth nexus: Evidence from South Asian middle-income countries. Global Business Review, 18(4), 924-935. https://doi.org/10.1177/0972150917692245

Mushtaq, M., Hameed, G., Mahmood, N., & Hanif, M. (2025). Financial development, financial globalization, and economic growth volatility: A comparative analysis for developing and developed economies. Journal of the Knowledge Economy. https://doi.org/10.1007/s13132-025-02722-9

Mustafa, G. (2023). The dynamic relationship between financial development, economic growth, foreign direct investment and trade openness: Evidence from South Asian countries. Millennial Asia, 14(3), 406-433. https://doi.org/10.1177/09763996221138465

Navarro, C. E. B., Álvarez-Quiroz, V. J., Ruiz, J. D. M., Alvarado, J. F. C., & Silva, R. H. (2024). Natural gas, trade openness and economic growth in Peru: 1965-2022. Energy Strategy Reviews, 53, 101428. https://doi.org/10.1016/j.esr.2024.101428

Odhiambo, N. M., & Nyasha, S. (2020). Financial development and economic growth in Uganda: A multivariate causal linkage. Journal of African Business, 23(2), 361-379. https://doi.org/10.1080/15228916.2020.1838834

Pandey, A. (2022). Credit and financial access in Nepalese agriculture: Prospects and challenges. Journal of Agriculture and Environment, 23, 56-70. https://doi.org/10.3126/aej.v23i1.46868

Pesaran, M. H., Shin, Y., & Smith, R. J. (2001). Bounds testing approaches to the analysis of level relationships. Journal of Applied Econometrics, 16(3), 289-326. https://doi.org/10.1002/jae.616

Puscasu, E. (2022). The impact of financial systems on economic growth in European Union member countries. Proceedings of the International Conference on Business Excellence, 16(1), 722-731. https://doi.org/10.2478/picbe-2022-0068

Rahmije, M. T., & Xhelili Krasniqi, F. (2025). Remittances, financial development and economic growth: A dynamic panel data approach. Contemporary Economics, 19(2), 208-229. https://doi.org/10.5709/ce.1897-9254.562

Rasoulinezhad, E., & Mostaghimi, N. (2024). How can financial development affect sustainable economic development? Evidence from Asian countries with different income levels. Iranian Economic Review, 28(1), 31-48. https://doi.org/10.22059/IER.2024.334304.1007325

Rehman, A. (2019). The nexus of electricity access, population growth and economic growth in Pakistan and projection through 2040: An ARDL cointegration approach. International Journal of Energy Sector Management, 13(3), 747-763. https://doi.org/10.1108/IJESM-04-2018-0009

Roquez-Diaz, A., & Escot, L. (2018). Relationship between trade openness and economic growth in Latin America: A causality analysis with heterogeneous panel data. Review of Development Economics, 22(2), 658-684. https://doi.org/10.1111/rode.12358

Roubalová, L., & Viskotová, L. (2019). The time-augmented Cobb-Douglas production function. Acta Universitatis Agriculturae et Silviculturae Mendelianae Brunensis, 67(5). https://doi.org/10.11118/actaun201967051347

Rustamov, B., & Adaoglu, C. (2018). Oil production cost, financial development, and economic growth in Russia. Energy Sources, Part B: Economics, Planning, and Policy, 13(6), 301-309. https://doi.org/10.1080/15567249.2018.1477868

Sehrawat, M., & Giri, A. (2016). The impact of financial development on economic growth. International Journal of Emerging Markets, 11(4), 569-583. https://doi.org/10.1108/IJOEM-11-2014-0172

Smirnov, R. G., & Wang, K. (2021). The Cobb-Douglas production function revisited. In International Conference on Applied Mathematics, Modeling and Computational Science (pp. 725-734). Springer. https://doi.org/10.1007/978-3-030-63591-6_66

Strulik, H. (2024). Long-run economic growth despite population decline. Journal of Economic Dynamics and Control, 168, 104943.

https://doi.org/10.1016/j.jedc.2024.104943

Sutbayeva, R., Abdeshov, D., Shodyrayeva, S., Maukenova, A., Bekteshi, X., & Doğan, M. (2024). The nexus between ICT, trade openness, urbanization, natural resources, foreign direct investment and economic growth. International Journal of Sustainable Development & Planning, 19(2), 723-730. https://doi.org/10.18280/ijsdp.190229

Thanh Trong, N., Thi Dong, N., & Thi Ly, P. (2024). Population aging and economic growth: Evidence from ASEAN countries. Cogent Business & Management, 11(1), 1-16. https://doi.org/10.1080/23311975.2023.2298055

Tripathy, N., & Mishra, S. (2023). The dynamics of cointegration between economic growth and financial development in emerging Asian economy: Evidence from India. Vision, 27(4), 485-497. https://doi.org/10.1177/09722629211011811

Wang, Y., Mazlan, N. S., Ngah, W. A. S. W., Faheem, M., & Liang, Y. (2024). Financial development and economic growth in Asian countries: Evidence from the DCCE approach. Eurasian Economic Review, 14(2), 397-420. https://doi.org/10.1007/s40822-024-00262-2

Wani, S. H. (2022). Trade openness, capital formation, and economic growth: Empirical evidence from India. Eurasian Journal of Business and Economics, 15(29), 35-49. https://doi.org/10.17015/ejbe.2022.029.03

Yao, W., Kinugasa, T., & Hamori, S. (2013). An empirical analysis of the relationship between economic development and population growth in China. Applied Economics, 45(33), 4651-4661. https://doi.org/10.1080/00036846.2013.795284