Is the Relationship between Financial Development and Economic Growth Monotonic? Evidence from a Sample of Middle Income Countries

34 Pages Posted: 8 May 2014  

Nahla Samargandi

King Abdulaziz University - Department of Economics

Jan Fidrmuc

Brunel University - Department of Economics and Finance; Centre for Economic Policy Research (CEPR); University of Michigan at Ann Arbor - The William Davidson Institute

Sugata Ghosh

Brunel University London - Economics and Finance

Date Written: April 8, 2014

Abstract

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

Suggested Citation

Samargandi, Nahla and Fidrmuc, Jan and Ghosh, Sugata, Is the Relationship between Financial Development and Economic Growth Monotonic? Evidence from a Sample of Middle Income Countries (April 8, 2014). CESifo Working Paper Series No. 4743. Available at SSRN: https://ssrn.com/abstract=2434445

Nahla Samargandi

King Abdulaziz University - Department of Economics ( email )

King Abdulaziz University, Saudi Arabia
Jeddah, 12411
Saudi Arabia

Jan Fidrmuc (Contact Author)

Brunel University - Department of Economics and Finance ( email )

Uxbridge UB8 3PH
United Kingdom
+44 1895 266 528 (Phone)
+44 1895 269 770 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

University of Michigan at Ann Arbor - The William Davidson Institute

724 E. University Ave.
Wyly Hall
Ann Arbor, MI 48109-1234
United States

Sugata Ghosh

Brunel University London - Economics and Finance ( email )

Uxbridge UB8 3PH
United Kingdom

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