Abstract
This paper utilizes the Least Squares Dummy Variables (LSDV) technique in investigating the effect of financial depth on economic growth within a sample of middle-income countries, over the period 2005–2017. The research finds that financial depth has a negative impact on real GDP growth within middle-income countries. This result is robust to the use of alternative measures of financial depth, the use of per capita GDP growth as a proxy for economic growth, the inclusion of dummy variables to control for the 2007–2010 global financial crisis, the exclusion of countries with high average growth as well as across income levels. Based on its findings, this study recommends the need for robust regulations to ensure that the credit facilities of domestic financial institutions are channeled towards productive investments rather than debt servicing.
Highlights
Over the last decade, the topic of financialization and its concomitant effect on economic growth has generated a lot of attention among policy makers and researchers alike. Demirguc-Kunt et al (2018) in the 2017 Global Findex Database report that as many as 1.2 billion adults have since 2011 obtained an account
The result indicates that a one percentage point increase in private credits results in a 0.08 percentage point fall in real GDP growth at 1 percent significance level
We find that a one standard deviation increase in private credits results in a 0.56 standard deviation decrease in real GDP growth, at 1 percent significance level
Summary
The topic of financialization and its concomitant effect on economic growth has generated a lot of attention among policy makers and researchers alike. Demirguc-Kunt et al (2018) in the 2017 Global Findex Database report that as many as 1.2 billion adults have since 2011 obtained an account. Robinson (1952) opines that growth arises from an increase in the economic activities which take place in the real sector and as such concluded that financialization rather responds to economic growth and not vice versa. From this perspective, finance would seem not to cause growth; (see Estrada et al, 2010; Moosa, 2017; and Arcand et al 2012). Financial depth is measured with: (1) Private credits by deposit money banks, Bank assets of deposit money banks (2) Liquid liabilities (3) Financial system deposits (4) Private credit by all financial institutions Each of these variables is expressed as a percentage of the GDP.
Sign-in/Register to view highlights & summary Sign-in/Register to access full text options 
Free) 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a call
