Financial Development and Economic Growth: New Evidence From Panel Data

Posted: 11 Oct 2018

See all articles by M. Kabir Hassan

M. Kabir Hassan

University of New Orleans - College of Business Administration - Department of Economics and Finance

Benito Sanchez

University of New Orleans - College of Business Administration - Department of Economics and Finance

Jung-Suk Yu

School of Urban Planning & Real Estate Studies, Dankook University

Date Written: 2011

Abstract

This study provides evidence on the role of financial development in accounting for economic growth in low- and middle-income countries classified by geographic regions. To document the relationship between financial development and economic growth, we estimate both panel regressions and variance decompositions of annual GDP per capita growth rates to examine what proxy measures of financial development are most important in accounting for economic growth over time and how much they contribute to explaining economic growth across geographic regions and income groups. We find a positive relationship between financial development and economic growth in developing countries. Moreover, short-term multivariate analysis provides mixed results: a two-way causality relationship between finance and growth for most regions and one-way causality from growth to finance for the two poorest regions. Furthermore, other variables from the real sector such as trade and government expenditure play an important role in explaining economic growth. Therefore, it seems that a well-functioning financial system is a necessary but not sufficient condition to reach steady economic growth in developing countries.

Keywords: Financial Development, Economic Growth, Panel Regression, Granger Causality Tests

JEL Classification: G21, O16, C33

Suggested Citation

Hassan, M. Kabir and Sanchez, Benito and Yu, Jung-Suk, Financial Development and Economic Growth: New Evidence From Panel Data (2011). The Quarterly Review of Economics and Finance 51 (2011) 88–104, Available at SSRN: https://ssrn.com/abstract=3263182

M. Kabir Hassan (Contact Author)

University of New Orleans - College of Business Administration - Department of Economics and Finance ( email )

2000 Lakeshore Drive
New Orleans, LA 70148
United States

Benito Sanchez

University of New Orleans - College of Business Administration - Department of Economics and Finance ( email )

2000 Lakeshore Drive
New Orleans, LA 70148
United States

Jung-Suk Yu

School of Urban Planning & Real Estate Studies, Dankook University ( email )

152, Jukjeon-ro, Suji-gu, Yongin-si
Gyeonggi-do, 16890
Korea, Republic of (South Korea)

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