Financial Development and Poverty Reduction in Bangladesh: Evidence from the ARDL Bound Testing Approach

Abstract

This paper investigates how financial development is related to poverty reduction in a developing nation such as Bangladesh. Employing the ARDL bound testing approach to cointegration, the study finds that the variables representing poverty reduction and financial development are cointegrated. The long-run and the short-run estimations indicate that financial development reduces poverty. In particular, on average, a 1 percent increase in financial development reduces poverty by 0.6 percent in the long run, and in the short run, the rate is 0.4 percent. The results are robust even when controlling for military expenditure and macroeconomic stability variables. The study also discovers that even though military expenditure may seem innocuous in the short run, it hurts poverty reduction in the long run.