An Empirical Study on the Relationship between Economy and Finance in Underdeveloped Areas Based on the VAR Model

Abstract

In recent years, the level of local economic, social, and financial development had been greatly improved. However, due to the large gap between regions, the economic and financial industries in underdeveloped regions restricted the further development of the whole national economy to a great extent. It was known from the existing research that economic development was inseparable from the support of the financial industry, but the role of the financial industry in the process of regional economic development had not attracted attention. Therefore, from the perspective of economic development in underdeveloped areas, this paper put forward relevant assumptions by analyzing the relationship between economic growth and financial factors. In view of the development of financial industry in underdeveloped areas, this paper mainly analyzed from three aspects: banking, securities, and insurance, and selected corresponding indicators to observe the changes of banking, security, market and insurance market. Vector autoregressive model and vector error correction model were used to carry out cointegration test and Granger causality test for financial and economic-related indicators in underdeveloped areas. According to the impulse response function and variance decomposition results, this paper analyzed the dynamic relationship between financial development and economic growth, as well as the disturbance and duration of financial factors on economic development. The empirical results showed that the VAR model can better analyze the relationship between financial growth and economic growth, as well as the role of financial factors in the process of economic development. This study can provide reference for formulating financial development policies suitable for economic development.