Abstract
The objective of this study is to investigate the nexus between financial development (FD) in economic growth (GROWTH) in developing countries. The study uses panel data from 138 developing countries during the period 1980–2018. The relationship between financial development and economic growth is investigated using four explanatory variables that are commonly used to measure the level of financial development and several other control variables, including a dummy variable representing the financial and banking crises. The sample of 138 developing countries is also classified into six geographic regions. We have carried out panel unit-root tests and panel cointegration tests before estimating the specified models using both Panel Least Squares (Panel LS) and Panel Fully Modified Least Squares (FMOLS) methods. In addition, panel Granger causality tests have been conducted to identify the direction of causality between FD and GROWTH for each of the regions. The results of the study provide evidence of a direct relationship between FD and GROWTH in developing countries. Furthermore, there is evidence of bi-directional causality running from FD to GROWTH and from GROWTH to FD in samples of Europe and Central Asia, South Asia, and all countries, but not in East Asia and Pacific, Latin America and the Caribbean, Middle East and North Africa, and Sub-Saharan Africa.
Highlights
The relationship between financial development (FD) and economic growth (EG) has been studied theoretically and empirically since as early as the 1900s
The objective of this study is to investigate the nexus between financial development and economic growth
The selected sample of 138 developing countries was grouped by six geographic regions
Summary
The relationship between financial development (FD) and economic growth (EG) has been studied theoretically and empirically since as early as the 1900s. Empirical studies have been conducted on either individual countries such as Bolivia, Egypt, Ghana, and Turkey, or on geographic regions such as North Africa and Sub-Saharan Africa, Asia, the Caribbean, Europe, and Latin America, or by income groups (developing, developed, and emerging countries), among others. Causality relationships are tested using the pairwise panel Granger causality test In addition to this contribution to the literature, we focus on a large sample of 138 developing countries categorized by the World Bank, between 1980–2018, and parse them into six geographical regions: East. There is evidence of bi-directional causality running from financial development to growth and vice versa in samples of Europe and Central Asia, South Asia, and all countries, but not in East Asia and the Pacific, Latin America and the Caribbean, Middle East and North Africa, and. The paper is organized as follows: Section 2 presents a review of the literature, Section 3 presents the methodology and data sources, and Section 4 presents and discusses empirical results, and Section 5 summarizes our conclusions
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