Does Financial Development Affect Growth?

Abstract

This paper contributes to the literature on the relationship between financial development and economic growth in three ways: it utilises recently developed techniques for generalised methods of moments (GMM) one-step estimation with dynamic panel models, it focuses exclusively on a sample of developing countries and it uses as proxies for financial development variables which capture both banking sector and stock market effects. The results provide evidence, based on a panel of annual data for thirty developing countries, that while the stock market variables are positively and significantly related to growth, their presence results in the standard banking sector variables, credit to the private sector and liquid liabilities, having negative effects on growth.