The Relationship between Financial Freedom, Financial Depth and Mutual Funds: Panel Bounds Testing Approach

Abstract

The purpose of this study is to investigate the nexus between mutual fund assets, financial freedom, and financial depth in 54 countries from 2000 to 2011 by employing panel ARDL bounds testing approach. To examine this linkage, we use the two-step procedure from ARDL bounds testing model: In first step, we explore the long-term relationship between the variables by using ARDL test of cointegration. Secondly, we employ a dynamic error correction model to explore the short-term relationship between the variables. All results suggest that there is a positive and statistically significant evidence between central bank independence, financial freedom, and economic growth in both long and short-term. Besides, long-term empirical results refer that current period central bank independence and financial freedom are the important factors for determining the national output level. In addition, the results of the shortterm dynamics are parallel with the long-term estimation results. Furthermore, because the error correction term is found negative and statistically significant, it can be said that the variables converge to equilibrium quickly, and short-term imbalances will be overcomed in the long-term.