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<p>Building on the neoclassical growth model, the paper develops an analytical framework that links financial development, investment, openness, total factor productivity (TFP), and human capital to per capita income and economic growth. It then calibrates this framework using Indian macroeconomic time series from 1981 to 2021. Results from Johnson's multivariate framework reveal long-term linkages among various specifications of these variables. The study then explores short- and long-term growth trajectories, expanding the cointegrated framework. It finds that financial development has a dual effect: a growth-accelerating short-term impact and a long-term growth-retiring effect. Foreign Direct Investment (FDI) shows a long-run growth effect but a detrimental impact in the short run. Domestic investment influences growth only in the long term. The findings also support the idea that TFP plays a key role in the growth trajectory. Additionally, trade openness harms long-term growth, while the human capital index has a relatively weak short-term growth effect. The robustness of these results is verified through the Wald test of Granger causality. The paper discusses the macroeconomic implications of these empirical findings, some of which differ from the theoretical perspectives outlined in the study.</p>

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Financial Development, Investment, and Economic Growth in Open Economy: Theory and Evidence from India

  • 期刊论文

  • 发表日期：

    2026年5月11日

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  • Biswajit Maitra

摘要

Building on the neoclassical growth model, the paper develops an analytical framework that links financial development, investment, openness, total factor productivity (TFP), and human capital to per capita income and economic growth. It then calibrates this framework using Indian macroeconomic time series from 1981 to 2021. Results from Johnson's multivariate framework reveal long-term linkages among various specifications of these variables. The study then explores short- and long-term growth trajectories, expanding the cointegrated framework. It finds that financial development has a dual effect: a growth-accelerating short-term impact and a long-term growth-retiring effect. Foreign Direct Investment (FDI) shows a long-run growth effect but a detrimental impact in the short run. Domestic investment influences growth only in the long term. The findings also support the idea that TFP plays a key role in the growth trajectory. Additionally, trade openness harms long-term growth, while the human capital index has a relatively weak short-term growth effect. The robustness of these results is verified through the Wald test of Granger causality. The paper discusses the macroeconomic implications of these empirical findings, some of which differ from the theoretical perspectives outlined in the study.