The inter-linkages between financial and economic development in the European Union Countries

Romualdas Ginevičius,Gitana Dudzevičiūtė,Martin Schieg,Kęstutis Peleckis

doi:10.1080/1331677x.2019.1663436

Abstract

The paper has investigated the relationships between financial and economic development in the European Union countries using annual data over the period of 1998–2016. The authors have done this by looking at descriptive statistics and also by applying econometric methods. This study has combined different approaches prevailing in the scientific literature and contributed to understanding the importance of the interrelationship between the variables. The investigation has led to the conclusions as follows: (1) the countries with the middle GDP per capita indicators have demonstrated the highest level of financial development; (2) unidirectional causality running from real GDP to financial development has been detected in Denmark, Portugal and Latvia; (3) unidirectional causality running from financial development to real GDP has been found in Austria; (4) two-way causal relationships between financial and economic development have been detected in Luxembourg, France and United Kingdom; (5) the results of Finland, Germany, Czech Republic, Slovakia, Croatia and Bulgaria have supported the neutrality approach. The research provides general insights and a better understanding to formulate the directions for sustainable economic development in the countries under consideration.

Highlights

The interrelationship between financial and economic development has been widely debated among scholars both in theoretical and empirical studies
Economists have debated over the nature of causality: whether financial sector causes economic development or economic performance leads financial sector development
A number of the studies examining financial – economic development nexus has been scarce for the European Union countries

Summary

Introduction

The interrelationship between financial and economic development has been widely debated among scholars both in theoretical and empirical studies. The scientific literature on the finance – economic development nexus has held an inconclusive explanation about the association between these variables. Earlier scientific literature has suggested significant disagreements on the finance economic development nexus (Zhuang et al 2009). In 1952, Robinson (1952) presented different opinion that the financial sector did not influence economic performance, but it just followed or reflected economic development (Simion et al 2015; Zhuang et al 2009). Nobel Laureate Robert Lucas (1988) dismisses finance sector as a determinant of economic growth. Nobel Laureate Merton Miller (1998) argued that the financial sector contributed to economic growth (Zhuang et al 2009)

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