The Effect of Money and Capital Market Development on Growth of Value Added in the Industrial Sector in Iran Using Principal Component Analysis

The existence of backward and forward relationship among different industrial sectors together and with other sectors of the economy (agriculture, construction and services) has led to the importance of industry in the national economy to be higher than its share in GDP. On the other hand, developed financial markets introduced as the factors affecting the growth of value added in industry sector. According to the structure of Iran financing system, the present research study the effect of the development of the financial markets of the money and capital markets on growth of value added of industrial sector in Iran during 1990-2013. Therefore, using principal component analysis through the five indicators of money market development and three indicators of capital market development, a composite index related to each market has extracted and then estimated research model in three different modes and using fully modified version of ordinary least square method. Results suggest a significant positive impact on the development of money and capital on the growth of value added of industrial sector of Iran during the period under review. Also, the coefficient of expansion of the money market is larger than the coefficient of capital market development that verified Bank-based supply financing system in Iran.