The tipping point of financial development? – evidence from OECD countries

Abstract

This study estimates the tipping points of financial development in the finance – growth dynamics in the case of OECD countries as they experience considerably higher levels of financial development. Using a unique balanced panel data set of 31 years from 1983 to 2013 for 27 OECD countries, we provide new evidence on the presence of nonlinearity as there is an inverted U-shaped relationship between finance and growth in the long run. The results show that there exists a tipping point of the finance-growth relationship estimated at 141.6% of GDP. We find that surpassing the threshold level results in deceleration of economic growth as excess finance is undesirable. Based on the panel Granger causality test results, we show that financial development should be associated with optimal growth performance. Our findings for OECD countries provide some useful inferences to the emerging and developing economies in designing their financial development strategies.