Superimposing Space onto the Relationship between Financial Development and Economic Growth

Abstract

We investigate the relationship between financial development (FD) and economic growth (EG) for a selected sample of 20 emerging market economies by adopting a dynamic spatial modelling framework with common factors. Annual data for the period 1996-2018 is used. Empirical findings suggest that FD affects EG negatively. Furthermore, there are negative spillovers on the EG rates of the neighboring countries which are generated by the financial sector improvements in any single emerging country. This is a striking finding that it questions the old argument that financial sector or financial market development leads always to favorable effects on economic performance. The policy suggestion that follows is that the policy makers in the sampled countries should keep the financial sectors under control by regulations so as to stabilize their EG rates. Besides, they should design economic policy measures to protect their economic performances from the negative spillovers transmitted from the neighboring emerging countries.

Keywords

• financial development
• economic growth
• spatial dependence
• common factors
• finansal gelişme
• ekonomik büyüme
• mekansal bağımlılık
• ortak faktörler