Financial Development Aspects Analyses in Economic Growth

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. In the short run, the relationship is insignificant. Thissuggests that too much finance can exert a negative influence on growth in middle-income countries. The finding of anon-monotonic effect of financial development on growth is confirmed by estimating a threshold model. To documentthe relationship between financial development and economic growth, we estimate both panel regressions and varianceDecompositions of annual GD 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 developmentand economic growth in developing countries. Moreover, short-term multivariate analysis provides mixed results: atwo-way causality relationship between finance and growth for most regions and one-way causality from growth tofinance for the two poorest regions. Furthermore, other variables from the real sector such as trade and government expenditure play an importantrole in explaining economic growth. Therefore, it seems that a well-functioning financial sys-tem is a necessary but not sufficient condition to reach steady economic growth in developing countries.

Financial Development Aspects Analyses in Economic Growth Keywords:

Financial development , Economic growth , Panel regression , proxy measures