Investigating the relationship between financial market development and economic growth in Iran

Dissertation for MA degree

Field: Business Administration

Abstract:

Based on economic theories, the development of the financial system through the expansion and diversification of the country's financial markets leads to a more appropriate allocation of resources and ultimately faster economic growth. The main goal of this research is to investigate the relationship between the development of monetary and financial markets and economic growth in the Iranian economy. For this purpose, the model has been estimated using the autocorrelated pattern method with ARDL distribution breaks. The time period studied in this research was from 1370 to 1392. The GDP variable is considered as a dependent variable and the capital stock, human resources, the amount of bank credits and the volume of stock exchange transactions are considered as independent variables. The results of this study show the absence of certainty in the positive and significant impact of the development of monetary and financial markets on economic growth. Key words: economic growth, money market development, investment efficiency, financial intermediaries. Introduction Currently, a large part of the economic literature confirms that the long-term economic growth and prosperity of a country, in addition to other important factors, is related to the degree of financial development of that country. Equipping capital resources as well as the optimal allocation of these resources affects economic growth, in other words, financial development indicators affect capital accumulation and productivity indicators, and these indicators also affect economic growth. The development of the financial system through the expansion and diversification of the country's financial markets leads to a more appropriate allocation of resources and ultimately faster economic growth. From 1338 to the end of 1355, Iran's gross domestic product has reached 242 thousand billion Rials (at constant prices of 1376) in an upward trend. In fact, the size of Iran's economy has increased 5.5 times in 17 years. With the beginning of revolutionary conditions in 1356, the production process is also reversed and begins its downward trend. The declining conditions of production continue due to the instability of the revolutionary period and then the start of the Iran-Iraq war, so that the production with a 30% decrease, from 242 thousand billion rials in 2015, to 170 thousand billion rials at the end of 2013. After that, despite the increase in production in 1961 and 1962, the downward trend continued until 1967 (the year the war ended), but from 1368, the upward trend in production started again and, except for a three-year period (from 1972 to 1974), when the increase in production stopped, it continued until the end of 1988, so that the production went from 180 thousand billion Rials in 1967 to 519 thousand billion Rials. In fact, the size of Iran's economy has doubled in 21 years.

In Iran, a significant part of the participation of the financial markets in the economic growth of the country takes place through banks and other formal and informal financial institutions and the money market in general.

Based on theoretical discussions, the financial system, including the money market, has five characteristics: risk participation and facilitation, allocation of resources, control and supervision of managers, mobilization of savings and facilitation of exchange, affects economic growth.

1-2 statement of the problem

The importance of developing financial markets in economic growth has always been one of the key issues in development economics. According to classical economists, the financial sector and the real sector constitute the two sectors of an economy, and achieving higher economic growth in any society requires efficient, complementary and powerful real and financial sectors. It seems that in less developed countries, first the growth and expansion of the financial sector causes economic growth, and then with the passage of time, the importance of the financial sector in economic development decreases and the development of the real sector becomes more important. However, this important question is always in front of researchers and policy makers, is there a relationship between economic growth and financial development? Do more developed financial markets increase the level of growth?

With the expansion of financial markets, different possibilities and areas of investment are formed, and the private sector is able to choose a variety of solutions that suit its needs for saving in conditions with less risk. Also, by equipping the resources from savers' funds and directing them to profitable economic activities with high added value, it can increase economic growth.It is important to mention that due to the dissimilarity of the financial structure in all countries, it is not possible to prescribe a single prescription for the relationship between financial development and economic growth.

A set of criteria is used to show financial development. One measure is the ratio of people's savings in banks or the share of loans allocated to the private sector. By reducing exchange costs in the economy, the financial sector ultimately improves the level of savings, capital accumulation, technological growth, and economic growth, and such an effect can occur from several different paths. Financial development occurs when the ability of the financial market to perform these tasks is developed, and the decision-making for savings and investment is improved, and ultimately causes economic growth.  Financial markets are considered due to their essential role in collecting resources through small and large savings in the national economy, optimizing the circulation of financial resources and directing them towards the needs and investment needs in productive sectors of the economy. The positive effects of the securities market on economic development, including increasing investment motivation through risk reduction, risk pricing, facilitating liquidity risk, and equipping and mobilizing deposits. It is so much and sensitive that some economists are of the opinion that the difference between developed and undeveloped economies is not in the advanced technology of the developed but in the presence of active and widespread integrated financial markets. Markets that underdeveloped countries are deprived of. These studies show that the level of development of financial markets, especially the stock market, and the effect they have on the financing of companies and the choice of financing methods of companies, ultimately leave a tremendous impact on economic growth. Advanced financial markets, such as the financial markets of advanced industrial countries, control a significant amount of financial capital of the relevant economy. These markets are responsible for the motivation to save and convert savings into investment with the purpose of capital formation and therefore assume an important role in accelerating economic growth (Khatai et al., 2018. This thesis, while addressing the functions of financial markets in creating economic growth in countries, seeks to determine the position of financial markets in the economic growth of these countries by comparing the impact of financial markets on economic growth in Iran.

1-3 The importance and necessity of conducting research

Identifying the relationship between these two important economic variables and the factors affecting them is one of the topics that has always attracted the attention of economists and various and sometimes conflicting theories have been presented. The answer to this question, what is the relationship between financial market development and economic growth, is also important for economic planning in the field of economic policymakers. The main goal of this research is to examine the dynamic relationship between financial market development and economic growth in Iran's economy. The results of this research are used by researchers and students of accounting economics and financial management. It will also be useful for managers and policymakers in making better decisions. The study of past research on the influence of financial market growth on economic growth in Iran has sometimes had conflicting results, so that in some researches a negative relationship has been obtained and in others a positive relationship has been obtained, therefore research in this regard in the desired time period can help to understand the real relationship between economic growth and financial market development. Objectives:- The possibility of planning for the expansion of the financial market in order to achieve the growth of national production. Is there a long-term relationship between the development of the money market and the growth of the gross domestic product in Iran? 4- Is there a causal relationship between the development of the money market and the growth of the gross domestic product in Iran? 1-6 research hypotheses: 1- There is a long-term relationship between the development of the capital market and the growth of the gross domestic product in Iran.