Abstract
Recent literature has established a positive correlation between financial development and economic growth. While papers such as Bencivenga, Smith and Starr (1995) identify potential nonlinearities in this relationship, empirical research to date has allowed for only linear relationships. This paper uses regression tree techniques to investigate whether the partial correlation between economic growth and financial development differs based on countries' levels of financial and economic development. As in previous studies, the relationship between growth and financial development is positively correlated in countries with high levels of market capitalization; however, this relationship does not appear to hold for countries with low levels of market capitalization. This is consistent with nonlinearities of the type in Bencivenga et al. (1995).
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