Convergence Patterns in Financial Development: Evidence from Club Convergence
40 Pages Posted: 24 Dec 2010 Last revised: 4 Feb 2013
Date Written: April 22, 2010
This paper analyzes the degree of convergence of financial development for a panel of 50 countries. We apply the methodology of Phillips and Sul (2007) to various financial development indicators to assess the existence of convergence clubs. We consider nine such indicators that various researchers use to proxy for the degree of financial development in countries. Overall, the results do not support the hypothesis that all countries converge to a single equilibrium state in financial development. Nevertheless, strong evidence exists of club convergence. Countries demonstrate a high degree of convergence in the sense that they form only two or three converging clubs, depending on the measure of financial development used. We then apply the Phillip-Sul method to per capita output and also find strong evidence of seven distinct convergence clubs in per capita output. Finally, we compare the various convergence clubs associated with financial development indicators to those clubs for per capita output. We conclude that strong evidence supports the correspondence between the convergence clubs for financial development and those for per capita output.
Keywords: economic growth, financial development, convergence clustering approach, financial indicators
JEL Classification: F43, F32, G21, C33
Suggested Citation: Suggested Citation