Investigating Finance-Growth Relationship by Considering Financialization Phenomenon: the Case of USA

Does financial sector develop in line with its nature? Does part of financial development, which is in line with its nature, approve mainstream opinion in regard to finance-growth relationship? By considering financialization phenomenon within an ARDL-Bounds testing approach, this study re-examined the causal relationship between financial development and economic growth in the USA during the period 1961–2012. Using Principal Component Analysis (PCA), indicators of financial sector development (FD) and financialization (FIN) were created. After that, Granger causality test was applied using the ARDL-ECM methodology. According to the results: 1) a bilateral relationship between financial development and economic growth was observed; while financial development had negative and significant impact on economic growth, the influence of economic growth on financial development was not significant although it was positive; 2) financialization significantly affected financial development through efficiency channel. Obtained results can be used by policy makers in different countries, although the study is applied for the USA.  JEL Classification: O11; O16; O51; G20.

Keywords:

Financial Sector Development , Economic Growth , Financialization , ARDL-Bounds Cointegration , Granger causality