Abstract
Research background: The relationship between financial development and economic growth has been attracting attention in the field of economics since the times of the ?great moderation?. Previous empirical studies still fail to put forward a general conclusion on whether and how financial development affects economic growth. This is particularly true due to the lack of empirical research on the matter in question for countries in transition.
 Purpose of the article: This study aims to contribute to bridging the gap in the financial development-growth nexus in transitional economies. Understanding the mechanism behind financial development and economic growth should assist policymakers in the design of efficient economic policies or avoiding/alleviating financial cycles.
 Methods: Using Granger causality test in frequency domain, which shows to have more power over standard time domain Granger causality test, as well as gross domestic product (GDP) and the monetary base (M2 ? intermediate money), we investigated the finance-growth relationship in 19 Central, East, and Southeast European countries (CESEE) from 1991 to 2017.
 Findings & Value added: Study results show that financial development is important for growth in CESEE countries, thus supporting the ?supply-leading? theories in general for countries in the sample. Our findings indicate that the relationship between financial development and economic growth exists in CESEE countries (with one exception ? the Czech Republic) ranging from unidirectional (Albania, Bosnia and Hercegovina, Belarus, Estonia, Macedonia, Russia, Turkey), to bi-directional spectral Granger causality (Bulgaria, Croatia, Hungary, Kazakhstan, Latvia, Lithuania, Poland, Romania, Slovenia, Slovakia, Ukraine).
Highlights
Financial development and economic growth nexus attracted general research in the field of finance
This paper investigates the link between financial development and economic growth in transitional economies using spectral Granger causality technique
Our findings indicate that financial development and economic growth link exists in (CESEE) countries, ranging from non, through unidirectional, to bi-directional spectral Granger causality
Summary
Financial development and economic growth nexus attracted general research in the field of finance. Financial development in any of the transitional economies followed a different evolutionary path This path, in turn, was mainly defined by the monetary policy (monetary sovereignty) role in economic growth. The choice of the monetary policy role determines the relationship between financial development and economic growth for transitional economies. Economic growth rates after 2000 averaging around 5% annually required more advanced loan policy leading to the development of financial sectors turning to the “demand following” side (Robinson, 1979).
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