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An alternate approach in exploring the causal link between financial development and economic growth—Evidence from advanced economies

Vighneswara Swamy () and M Dharani

International Journal of Finance & Economics, 2018, vol. 23, issue 1, 55-76

Abstract: This study explores the causal link between financial development and economic growth in advanced economies as these countries experience significantly higher levels of financial development. Using a fully balanced panel of 24 economies from 1983 to 2013, the study shows that when imposing a linear relationship, the financial development and economic growth are negatively associated in the long run. The panel granger causality tests establish the bidirectional causality between the financial development variables with growth. Employing an alternate approach of moderated mediation effect framework, we notice that the association of financial development with economic growth is moderated by the negative impacts of inflation, interest rate, and population dependency; and the positive mediation effect of trade openness. The policy implication is that there is a need to rein in inflation and real interest rates and enhance trade openness to optimize the benefits of growing financial development on economic growth.

Date: 2018
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International Journal of Finance & Economics is currently edited by Mark P. Taylor, Keith Cuthbertson and Michael P. Dooley

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