The Relationship between Financial Development and Economic Growth in Five Fragile Countries

Abstract

This study aimed to analyze the causality relationship between financial development and economic growth by using the data of the five fragile countries for the period 1980 to 2018. In this direction, the cross-section dependency is examined, and it is concluded that the cross-section is independent. Then, by performing the Delta homogeneity test, it is aimed to understand whether other countries are affected at the same level without a change occurring in any of the countries considered, and heterogeneity has been reached. Subsequently, the unit root test determines that the variables are stationary at different levels. Dumitrescu and Hurlin panel causality test is performed to test the causality relationship. As a result of the test, while it is seen that there is not a relationship between economic growth and financial development index, the examination with control variables confirmed that there is a causality relationship between economic growth and financial development. These results showed that the demand-leading hypothesis is valid in the five fragile countries. Finally, to understand the causality relationship more clearly in the study, the Hatemi-J asymmetric causality test was performed, and it is understood that the causality relationship between financial development and economic growth may differ according to country.