The Nexus between Financial Development and Economic Growth: Panel Data Evidence from Developing Countries

E. M. Ekanayake · Ranjini L. Thaver

43 citations0/0 files storedJournal of risk and financial management

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Monetary Policy and Economic Impact Economic Growth and Productivity Economic Growth and Development

Abstract

The objective of this study is to investigate the nexus between financial development (FD) in economic growth (GROWTH) in developing countries. The study uses panel data from 138 developing countries during the period 1980–2018. The relationship between financial development and economic growth is investigated using four explanatory variables that are commonly used to measure the level of financial development and several other control variables, including a dummy variable representing the financial and banking crises. The sample of 138 developing countries is also classified into six geographic regions. We have carried out panel unit-root tests and panel cointegration tests before estimating the specified models using both Panel Least Squares (Panel LS) and Panel Fully Modified Least Squares (FMOLS) methods. In addition, panel Granger causality tests have been conducted to identify the direction of causality between FD and GROWTH for each of the regions. The results of the study provide evidence of a direct relationship between FD and GROWTH in developing countries. Furthermore, there is evidence of bi-directional causality running from FD to GROWTH and from GROWTH to FD in samples of Europe and Central Asia, South Asia, and all countries, but not in East Asia and Pacific, Latin America and the Caribbean, Middle East and North Africa, and Sub-Saharan Africa.

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References

2003Testing for unit roots in heterogeneous panels 2002Unit root tests in panel data: asymptotic and finite-sample properties 2019Economic Growth and Income Inequality 1999A Comparative Study of Unit Root Tests with Panel Data and a New Simple Test 2001Unit root tests for panel data 2000Testing for stationarity in heterogeneous panel data 2004The local power of some unit root tests for panel data 1959THE STAGES OF ECONOMIC GROWTH

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