The relationship between financial development and economic growth: Heterogeneous panel da
This paper aims to take a fresh look of the dynamic relationship between financial development and economic growth in the short and long –run. The analysis employs a panel data set comprising 52 upper- and lower- middle income countries over the time of 1980-2008 and follows the techniques developed by Pesaran et.al (1999) for estimating an empirical model of short- and long run effect using Autoregressive distributed lag ARDL and then estimate the model based on the mean group (MG), Pooled mean group (PMG) We introduced a non-linear relationship between financial development and growth in all models we use in our analysis.
The empirical results of this analysis show that, the relationship between financial development and economic growth in the middle income countries is generally diminished and no more has a positive sign in the long-run. In the short-run the relationship is mostly negative but insignificant. When we consider quadratic nonlinear relationships between financial development and growth, the results confirmed the existence of an inverted U relationship between them. This finding throws out that Middle Income Countries (MIC) may have hit a certain point at which financial development no longer contributes to boosting economic growth.