A Re-Assessment of the Role of the Financial Sector in Driving Economic Growth: Recent Evidence from Cross Country Data

Abstract

In this study, we evaluate the empirical relationship between financial development and economic growth for 75 countries classified into different income groups. The study covers the sample period of 1990-2009. The empirical results suggest that there is a long-run equilibrium relationship between financial development and economic growth. The estimated results of FMOLS and MWALD Granger causality tests indicate that banks play a dominant role in promoting economic growth across all income groups. Savings significantly drive growth for low and middle income groups. Economic growth propels stock market development for low income group, stock market and economic growth are reinforcing for middle income group. While, stock market emerges as an important driver of economic growth for high income countries. Our findings are consistent with prior research and are relevant for academician, policy makers as well as financial institutions and market players.

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