Financial Development and Economic Growth: Static and Dynamic Panel Data Analysis

The relationship between financial development and economic growth has received a lot of attention in the economic literature in recent years. This study aims to revisit different econometric approaches used in panel data in relation of financial sector development and growth. In what follows, we extend our previous study by employing updated data and also exploring more questions related to the empirical link between financial development and growth. More specifically, we will investigate the issues relevant to static and dynamic panel data effect. We investigate the role of financial development (as measured by the credits to the private sector to GDP) in enhancing growth for different groups of countries. Estimations are conducted with a panel data of 70 countries over the period 1970-2009 using both LS (fixed effect) and GMM-Difference and GMM-System estimators for dynamic panel data. While the finding of a positive correlation between indicators of financial development and economic growth cannot settle this debate, advances in computational capacity and availability of large cross-country data sets with relatively large time dimensions have enabled researchers to rigorously explore the relationship between financial development and economic growth. Empirical results reinforce the idea that financial development promotes economic growth in all econometric approaches used in this paper.