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The Nonlinear Relationship between Economic growth and Financial Development

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  • Balázs Egert
  • Fredj Jawadi

Abstract

This paper studies the relationship between financial development and economic growth in a large sample of developing, emerging and advanced economies and on a separate, longer sample including only OECD countries over the recent period. Estimation results based on nonlinear threshold regression models do not confirm the too-much-finance-is-bad hypothesis, especially if the cross-country variation in the data is accounted for. We cannot indeed identify a tipping point beyond which financial development has a negative relation to economic development. What we see at best is that the positive effect of finance declines at higher levels of finance. Our results also show that banking and market finance are complementary. The positive effect of stock market deepening is larger when banking finance is more pronounced (and the other way around). But the thresholds above which complementarity kicks in are rather low. Finally, our results indicate that finance has a stronger positive effect in more developed countries. At the same time, the positive effect of finance is weaker in countries with lower trade openness. This may suggest that more open economies have access to alternative sources of external financing.

Suggested Citation

  • Balázs Egert & Fredj Jawadi, 2018. "The Nonlinear Relationship between Economic growth and Financial Development," EconomiX Working Papers 2018-26, University of Paris Nanterre, EconomiX.
    • Handle: RePEc:drm:wpaper:2018-26
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    More about this item

    Keywords

    financial development; economic growth; nonlinearity; threshold effects.;
    All these keywords.

    JEL classification:

    • C2 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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