Financial Development and Economic Growth: New Evidence

Abstract

Financial systems around the world have undergone considerable development. This paper analyzes the effect of financial development on economic growth. It replicates the estimation of Beck et al. (2000), one of the pioneering research papers in this field. Then, it tests the sensibility of the results by expanding the sample of countries (99) and the period (1961–2010). This study contributes to the literature by analyzing differentiated effects when a country’s economic conditions are incorporated. The results show that the positive impact of financial development on economic growth found by Beck et al. (2000) becomes non-significant if financial crises and macroeconomic instability periods are taken into account. However, if income per capita level is considered, the impact becomes positive and significant in high-income countries and decreases in low-income per capita countries. This impact is influenced by each country’s level of education, level of financial deepening, and average inflation rate over the last ten years.Financial systems around the world have undergone considerable development. This paper analyzes the effect of financial development on economic growth. It replicates the estimation of Beck et al. (2000), one of the pioneering research papers in this field. Then, it tests the sensibility of the results by expanding the sample of countries (99) and the period (1961–2010). This study contributes to the literature by analyzing differentiated effects when a country’s economic conditions are incorporated. The results show that the positive impact of financial development on economic growth found by Beck et al. (2000) becomes non-significant if financial crises and macroeconomic instability periods are taken into account. However, if income per capita level is considered, the impact becomes positive and significant in high-income countries and decreases in low-income per capita countries. This impact is influenced by each country’s level of education, level of financial deepening, and average inflation rate over the last ten years.