Financial development, financial stability and economic growth in European Union: a panel data approach

Abstract

The relationship between the financial development, financial stability and economic growth constitutes a field of academic research in recent years. For this purpose, dynamic panel data techniques are applied for the investigation of the impact of financial development and stability on economic growth. The empirical analysis is based on a sample of 28 countries of the European Union over the period 2004 – 2014. The results indicate that the development of banking system has a negative impact on economic growth. Therefore, the allocation of private credit is inefficient and does not improve the economic growth. Moreover, the results for the impact of financial markets development are mixed. Specifically, the size of the stock markets has a positive effect on economic growth, whereas the market liquidity negatively influences the economic growth. In addition, financial instability has a negative impact on economic growth. The rates of non-performing loans have increased in affected by financial crisis European Union countries and constitute a detrimental factor for economic growth. Finally, factors such as investment and trade openness play a significant role and promote the economic growth. However, inflation and government expenditure have a negative relationship with economic growth. JEL classification numbers: O10

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