Abstract

The research aims to study the causal relationship between the financial depth and economic growth in Iraq for the period (1990-2010) by using Granger causality test and correction error model to determine the direction of the this relationship, and augmented Dickey Fuller test (ADF) to examine stability of the time series which is adopted by this research. It has demonstrated the stability of the original time series of the economic growth average as measured by the real average of per capita income. That means, they are integrated at level I (0), but the stability of original time series, which represent the indicators of financial depth, has not been demonstrated only after taking their first difference into consideration, so they are integrated on the rank first:
I (1). Thereby, it is not allowed to make the counteraction tests and the error correction model, because in the counteraction test there should be an integration relationship between unstable series which characterized with same degree of integration. Besides, the counteraction relationship is regarded a necessary condition to using the error correction model. This demands to remove the effect of the general trend from time series which represent the financial depth in order to remove the stability. Therefore, the necessary condition to apply Granger causality has been achieved.
The causality test has shown that there is a causal relationship which is directed from the economic growth to the financial depth in all its different indicators, that is, the economic growth causes the financial depth according to granger concept, but the financial depth has no essential effect on the economic growth in Iraq. According to that, Iraq government has to activate the financial institutions, to attract the national capital inflows and to increase the foreign investments to stimulate the economic growth rates.