THE NEXUS BETWEEN FINANCIAL DEVELOPMENT (FD) AND ECONOMIC GROWTH (EG) IN THE PRESENCE OF INFLATION: CASE OF VIETNAM

Abstract

Despite the abundance of studies that have examined the correlation between financial development and economic growth, there are still gaps in our understanding. When incorporating the role of inflation into a framework, there appears to be a lack of relevant material. Furthermore, the present literature has contradictory claims, highlighting the need for research. Considering the economy of Vietnam, this article analyses the relationship between financial development and economic growth in the presence of inflation. A multilateral index for financial development is constructed using principal component analysis to achieve the purpose. Additionally, the study utilized. 1991 to 2021 has been selected as the period for this investigation. The findings indicate that financial development has a detrimental long-term influence on economic growth. However, a positive correlation is shown in the near term. The study also revealed that the threshold value of inflation is crucial for evaluating the proposed relationship. As in the case of Vietnam, it was discovered that economic growth increases due to financial development when the inflation rate is less than 9.2%, but the relationship is inverse when the inflation rate is more significant than 9.2%. The study suggests that financial intermediaries enhance and expand their credit policies to finance private-sector capital to enable the efficient allocation of capital in the private sector. The economy of Vietnam Regarding the growth of the financial market, it is required to complete the legal framework to encompass all operations, transactional developments, and supply and demand for goods.