Financial innovation, human capital development, and economic growth of selected South Asian countries: An application ofARDLapproach

This study investigates the interaction between financial innovation, human capital development and economic growth in Bangladesh, India, Pakistan, Sri Lanka, Nepal, and Bhutan for the period of 1981Q1-2016Q4 by applying Autoregressive Distributed Lag (ARDL) and Granger-causality under error correction model (ECM). Our principal finding confirms long-run association among financial innovation, human capital development, and economic growth of selected South Asian countries. Also, we found both long-run and short-run elasticities from financial innovation and human capital development to economic growth is positive for each country. The study confirms that economic growth of sample countries would positively affect any development in financial innovation and increase in investment for human capital development in future. We also perform a Granger-causality test to investigate directional causality, and we found bidirectional causality between financial innovation and economic growth, and human capital development and economic growth both in short-run and long-run, thus, supporting the feedback hypothesis. The study comes with two recommendations; first, the government should encourage financial innovation in the financial system and formulate fiscal policy in favour of adaption and diffusion of financial innovation. Second, public investment in human capital development should continue and made necessary initiative towards ensuring better implementation of undertaken measures in the economy.