The Nature of Finance – Growth Relationship: Evidence from a Panel of Oil-Producing Countries

Abstract

The position of research on the relationship between financial sector development and economic growth remains largely inconclusive. Several authors believe the relationship is monotonic while others show that it is non-linear. A section of growth literature indicates that this relationship varies, depending on the country’s specific context and the quality of its institutions. This paper examines the nature of the finance - growth relationship in a panel of oil-producing countries. We aim at determining the point of threshold where the relationship is non-linear and changes abruptly. We employ dynamic panel GMM and panel threshold regressors to analyse data from 30 oil-producing and 30 non-oil producing countries. Our results confirm the notion of “too much finance” using evidence of threshold in the relationship. We report evidence that this threshold varies from country to country depending on the states of institutions maintained in each country. We compare the finance-growth relationship in oil producing and the non-oil producing countries, the result is quite revealing. The non-oil producing countries outperform the oil-producing. Our paper agrees and disagrees with several recent studies on this topic. We discuss policy implications of our findings and make recommendation for reforms.