Investigating the Effect of Economic Growth on Financial Development (Comparing Developed and Developing Countries)

Among the key variables in each economy are financial development and economic growth, the bilateral relationship between which has been studied in various studies, and most previous studies have examined the effect of financial development on economic growth. Therefore, this study was conducted aimed at investigating the effect of variables including economic growth, exchange rate, energy consumption, government spending, degree of economic openness, inflation and GDP per capita on market- and bank-based financial development in 40 developed and developing countries using Panel Data method with 1990–2017 annual data. The results suggested that economic growth had a significant effect on bank-based development in developing countries. The estimated coefficient was -0.205, indicating an inverse relationship between economic growth and bank-based development in developing countries. On the other hand, economic growth had no significant effect on market-based development in these countries. Moreover, economic growth had a significant effect on bank- and market-based development in developed countries. The estimated coefficient was 0.403 for the market-based model and -0.293 for the bank-based model, indicating an inverse relationship between economic growth and bank-based development and the direct relationship between economic growth and market-based development in developed countries.

Keywords:

market-based financial development , bank-based financial development , economic growth , panel data model.