Relationship Between Financial Development and Economic Growth, Evidence from Financial Crisis

This research studies the influence of financial development on economic growth with emphasis on the recent financial crisis. Variables considered in this study are indicators of financial development consisting of the ratio of the banking system credits to GDP, the ratio of services provided by the banking system to the private sector to GDP and the stock exchange to GDP, and variables of effective economy such as the ratio of investment to GDP and the openness of the economy and also the dummy variable of 2008 financial crisis. Starting from the Unites States and then taking the whole economy in the world, the recent financial crisis has had different effects on countries' economy. In order to survey the effects of this crisis on economic growth of different states based on the World Bank classification, three groups of countries have been studied: developed countries members of the OECD, high average income countries and low average income countries. The results of the models estimated using generalized methods of moments demonstrate that the financial crisis has had the most influence on developing countries with high average income and its effect has been less on developed countries and developing countries with low and middle average income. Moreover, indexes of financial development considered in banking sector have had negative effect on all supposed countries, but capital market shows positive effect on economic growth during 1990-2010 in the countries with low average income and negative effect on developed and high average income countries.