Economic Growth and Financial Sector Development

Abstract

This paper estimates an Odedokun-type “supply-leading” model of financial sector development (FSD) which incorporates both banking and capital market variables as potential drivers of economic growth. The current findings illustrate the impact on economic growth of various measures of FSD which includes basic intermediation services, as measured by M2 and money market mutual funds, and more advanced financial products such as stock market development and risk management services. The empirical findings in this study document an important shift from an exclusive reliance on basic banking services among emerging/developing countries towards an expanding role for the capital markets. An even stronger emphasis on the role of capital markets is documented for a group of advanced countries.