Is the Relationship between Financial Development and Economic Growth Monotonic? Evidence from a Sample of Middle Income Countries
34 Pages Posted: 8 May 2014
Date Written: April 8, 2014
We revisit the relationship between financial development and economic growth in a panel of 52 middle income countries over the 1980-2008 period, using pooled mean group estimator in a dynamic heterogeneous panel setting. We show that financial development does not have a linear positive long-run impact on economic growth in this sample. When we consider a non-linear relationship between financial development and growth, we find an inverted U-shaped relationship between finance and growth in the long run. In the short-run, the relationship is insignificant. This finding suggests that middle income countries face a threshold point after which financial development no longer contributes to economic growth.
Keywords: financial development, economic growth, heterogeneous panels, pooled mean group estimation, non-monotonicity
JEL Classification: C230, O110, O160, O470
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