Impact of Financial Liberalization on Economic Growth in Iran: An Empirical Investigation

ABSTRACT: The aim of this thesis is to investigate the impact of financial liberalization on economic growth in Iran through Johansen Cointegration tests by using time series data from 1965 to 2005. While testing for the impact of financial repression on the economic growth in Iran, the thesis also investigates the determinants of economic growth in Iran. A financial liberalization index is used in econometric models along with the conventional theoretical determinants of economic growth as suggested by the existing economic growth theories such as Solow growth model, Endogenous growth model, Cobb-Douglas production function and the Export-Led growth hypothesis. The results suggest that financial intermediation, capital, research and development, and financial liberalization have positive and statistically significant impact on economic growth. In addition, reserve requirement ratio has a negative but statistically insignificant impact on economic growth. Likewise, exports have a positive but statistically insignificant impact on economic growth. On the other hand, the results suggest that labor shows a negative impact on economic growth in the case of Iran, which suggests that labor force in Iran is not effective in promoting economic growth on the contrary of what the existing theories suggest. This can be attributed to low productivity of the labor force. Keywords: Financial liberalisation, economic growth, Iran. ……………………………………………………………………………………………………………………………………………………………………………………………………………………