Does Finance Matter for Growth? What the Data Show

23 Pages Posted: 13 Dec 2006 Last revised: 23 Aug 2011

Date Written: March 29, 2009

Abstract

This paper analyses the relationship between financial development (as measured by expansion of domestic credit to private sector relative to GDP) and growth for a sample of 65 less developed countries over a long period, 1980-2006. Using causality tests at various lag-orders we find a strong evidence of mutual causation. We have used alternative dynamic panel data models to estimate the relationships between the two. While the mean group model suggests no relationship in either direction, the pooled mean group model and dynamic fixed effect model show two opposite long-term relationships: finance-to-growth relationship is negative whereas growth-to-finance link is positive.

Keywords: financial development, growth, dynamic panel data analysis

JEL Classification: O16, O50, G20, E44

Suggested Citation

Sarkar, Prabirjit, Does Finance Matter for Growth? What the Data Show (March 29, 2009). Available at SSRN: https://ssrn.com/abstract=951013 or http://dx.doi.org/10.2139/ssrn.951013

Prabirjit Sarkar (Contact Author)

University of Cambridge ( email )

Centre for Business Research
Cambridge, CB2 1AG
United Kingdom

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