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Financial development, oil dependence and economic growth: Evidence from the Republic of Yemen

Ramez Abubakr Badeeb (School of Social Sciences, Universiti Sains Malaysia, Penang, Malaysia)
Hooi Hooi Lean (School of Social Sciences, Universiti Sains Malaysia, Penang, Malaysia)

Studies in Economics and Finance

ISSN: 1086-7376

Publication date: 5 June 2017

Abstract

Purpose

This paper aims to examine the validity of the question of whether oil dependence has a negative impact on the relationship between financial development and economic growth in Yemen.

Design/methodology/approach

The auto-regressive distributed lag approach for cointegration is used to examine the relationship between financial development and economic growth by capturing the impact of oil dependence on this relationship. The Granger causality test, based on a vector error correction model (VECM) framework, is used to investigate the causal relationships between financial development and economic growth.

Findings

The most interesting finding is the negative sign of interaction term between financial development and oil dependence, which implies that the positive effect of financial development on economic growth decreases with the increasing oil dependence. The result of the VECM Granger causality test revealed the existence of unidirectional causality running from financial development to economic growth.

Research limitations/implications

The short sample period and the worry of losing degrees of freedom limited us when including control variables in the model. If the data are available in the future, other control variables can be added.

Practical implications

The government should reduce the level of oil dependence in Yemen by diversifying the country’s economy. Accelerating the pace and efficiency of the financial sector will bear fruitful returns in this regard. The government could achieve this strategy by playing a more proactive role in encouraging the expansion of credit to enable the financial sector to provide a more efficient intermediary role in mobilizing domestic savings and channeling them to productive investments across various economic sectors.

Originality/value

This is the first study to examine the impact of oil dependence on the finance-growth nexus in Yemen. A new indicator for oil dependence is also proposed.

Keywords

Citation

Badeeb, R.A. and Lean, H.H. (2017), "Financial development, oil dependence and economic growth: Evidence from the Republic of Yemen", Studies in Economics and Finance, Vol. 34 No. 2, pp. 281-298. https://doi.org/10.1108/SEF-07-2014-0137

Publisher

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Emerald Publishing Limited

Copyright © 2017, Emerald Publishing Limited