Economics Research

Abstract   In this study, to determine the exact effect of financial development on economic growth, we use quarterly data for 1988 to 2013 and apply factor-augmented vector autoregressive (FAVAR) model in combination with time-varying parameters model (TVP) for the case of Iranian economy. Variables used in this study include economic growth, ratio of government spending to GDP (as an index of government size), economic openness index (the ratio of exports and imports to GDP), inflation and financial development index (as an unobservable variable). Based on our results, the effect of financial development index on economic growth in the period under consideration is positive, an increase in government size leads to lower economic growth, in a way that the government size effect is more intense at times that oil revenues increase. In addition, the effect of inflation on economic growth is positive. Finally, the degree of trade openness on economic growth has a positive effect.