The Relationship Between Financial Development and Economic Growth In Iran: Using Factor Analysis Method

This paper investigates the long run relationship between financial development and economic growth since 1340 to 1385. Firstly, we study diverse instruments of Iranian financial system. Then, we define 8 indices extracted from banking system to represent indicator of financial development. Furthermore, we transform the indexes of financial development into a unique and comprehensive index by using factor analysis method. We estimate relationship between these variables an assess causality relationship by means of Granger Causality Test. Our findings show: (a) there is a direct relationship between financial development and economic growth in Iran and (b) the direction of causality isfrom economic growth to financial development.