Abstract
A sound and efficient financial system is an indispensable ingredient of economic growth. It consists primarily of banks and capital markets, which channel savings into investments and other productive activities that contribute to economic growth and augment the economy’s productive capacity. This paper explains the importance of financial development and openness. It sifts through the literature on the relationship between both variables and economic growth. It then reports the results and discusses some original empirical analysis. In addition to using more updated data, which extend the sample period to include some postcrisis years, the analysis examines whether country characteristics and factors such as the exchange rate regime affect the finance–growth nexus.
Highlights
Control variables, including period dummy variables indicated in table 1, are included in the estimation but not reported here
This paper examines the empirical relationship between financial development and economic growth
The global financial crisis has provoked widespread hostility toward the financial industry and widespread skepticism about its benefits for growth. Such concerns are less relevant for developing countries, where financial systems are generally much less developed, they provide compelling grounds for taking another look at the effect of financial development on growth
Summary
Several studies indicate that the depth of the financial system has a significant positive impact on growth. A larger financial system—as measured by liquid liabilities, private credit, and stock market capitalization—is associated with higher growth. Limited evidence indicates that greater financial openness leads to higher growth
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