Role of Share Market on Economy and on Society in Bangladesh

The Global Journal of Finance and Economics, Vol. 8, No. 1, (2011) : 49-60

INFLUENCES OF STOCK MARKET ON REAL ECONOMY:

A Case Study of Bangladesh 

Muhammad Enamul Haque* and Nahid Fatima**

ABSTRACT

This study investigates to empirically explore the relationship between stock market development

and long-run per capita growth rate of Bangladesh using the two dynamic panel models for the

sample period of 1980-2007. The first model tries to assess the stock market effect directly after

controlling for other variables where as the second one does it by having its influence through

investment. The results reflect that the none of the dynamic models is effective one to identify the

stock market linkage to per capita growth rate in Bangladesh. The implication is that stock

market in Bangladesh does not have any influence on the real economic activity. The results did

not lead support to empirical studies of Levive (1991), Levine & Zervos (1996, 1998), Islam

(1998) as well as other studies and theory that stock market has direct association with per

capita growth rate. The main reasons are identified that fund mobilised by stock market in

Bangladesh is still in transitional period and it is very small in relation to its economy.

Key Words: Economic Growth, Stock Market development, Unit Root, Financial Liberalization,

Dynamic Panel Model etc.

INTRODUCTION

Understanding the role of stock market in mobilizing the resources efficiently (which causes

the higher rate of investment and ultimately promotes the economic growth of the country) has

been an unbeatable issue in modern financial theory. A viable stock market provides a more

diversified set of channels (in channeling the limited resources from surplus units to deficit

units) for financial intermediation to support growth, thus bolstering financial stability of

economy.  The stock market through scanning the potential investment projects will stimulate

the rate of productive investments in economy. This implies that an...