Financial Development and Economic Growth: Evidence from a Heterogeneous Panel of High Income Countries

Abdul Razzaq Kemal, Abdul Qayyum and Muhammad Hanif

MPRA Paper from University Library of Munich, Germany

Abstract: This paper examines the empirical relationship between financial development and economic growth for high income countries. The study focuses on both indirect finance and direct finance, separately as well as jointly. Applying the methodology of Nair-Reichert and Weinhold (2001) for causality analysis in heterogeneous panel data, two sets of results are reported. First, the evidence regarding the relationship between financial development and economic growth from a contemporaneous non-dynamic fixed effects panel estimation is mixed. Negative and statistically significant estimates of the coefficient of the inflation and financial development interaction variable indicate that financial sector development may even be harmful to economic growth when inflation is rising. Second, in contrast with the recent evidence of Beck and Levine (2003), heterogeneous panel causality analysis applied on a refined model indicates that there is no definite evidence that finance spurs economic growth or growth spurs finance. Most of our findings are in line with the Lucas (1988) view that the importance of financial matters is over-stressed. The only exception is the case of activity in stock markets where our result supports the Robinson (1952) view that finance follows enterprise.

JEL-codes: E44 O16 (search for similar items in EconPapers)
Date: 2004
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Citations: View citations in EconPapers (12)

Published in The Lahore Journal of Economics Summer:1.12(2007): pp. 1-34

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Journal Article: Financial Development and Economic Growth: Evidence from a Heterogeneous Panel of High Income Countries (2007)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:10198

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