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Financial development, real sector, and economic growth

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  • Ductor, Lorenzo
  • Grechyna, Daryna

Abstract

This paper evaluates the interdependence between financial development and real sector output and the effect on economic growth. Using panel data for 101 developed and developing countries over the period 1970 to 2010, we show that the effect of financial development on economic growth depends on the growth of private credit relative to the real output growth. The findings also suggest that the effect of financial development on growth becomes negative, if there is rapid growth in private credit not accompanied by growth in real output. Our findings provide empirical evidence that supports the theories that postulate the existence of an optimal level of financial development given by the characteristics of an economy.

Suggested Citation

  • Ductor, Lorenzo & Grechyna, Daryna, 2015. "Financial development, real sector, and economic growth," International Review of Economics & Finance, Elsevier, vol. 37(C), pages 393-405.
    • Handle: RePEc:eee:reveco:v:37:y:2015:i:c:p:393-405
    DOI: 10.1016/j.iref.2015.01.001
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    More about this item

    Keywords

    Financial development; Real sector output; Economic growth;
    All these keywords.

    JEL classification:

    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models

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