Financial Development and Economic Growth: New Evidence From Panel Data
Posted: 11 Oct 2018
Date Written: 2011
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
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