Does financial development matter for economic growth in the emerging markets?

Abstract

Despite an increasing focus on the nexus between finance and growth, little is known about the growth effect of financial development in emerging markets. Financial development is generally considered a multifaceted phenomenon. Unlike previous studies, which use a static panel model or focus on a single country, this paper uses the advanced dynamic common correlated estimator (DCCE) and a panel Granger-causality test. We use panel data on 22 emerging markets over the period 1980–2020. Our empirical findings confirm that static panel data model in previous studies can have misleading conclusions on the relationship between financial development and economic growth. Instead, our findings confirm that financial development has a positive effect on economic growth, and their relationship is linear. We also find solid bidirectional Granger causality between financial development and economic growth in all proxies for financial development.

Keywords

• Causality
• DCCE
• Dynamic panel data
• Economic growth
• Emerging markets
• Financial development