Financial Development and Economic Growth Nexus:Time Series Evidence from Middle Eastern and North African Countries

This paper examines the causal relationship between financial development and economic growth in five Middle Eastern and North African (MENA) countries for different periods ranging from 1960 to 2004, within a trivariate vector autoregressive (VAR) framework. We employ four different measures of financial development and apply Granger causality tests using the cointegration and vector error-correction (VEC) methodology. Our empirical results show weak support for a long-run relationship between financial development and economic growth, and for the hypothesis that finance leads growth. In cases where cointegration was detected, Granger causality was either bidirectional or it ran from output to financial development. Our results also clearly demonstrate that causality patterns vary across countries and financial measures and, therefore, highlight the danger of statistical inference based on cross-section studies or using a financial measure that does not capture the different mechanisms through which.