Revaluing the Impact of Financial Development on Economic Growth and its Sources

This paper examines the empirical relationship between financial development and real per capita GDP growth, physical capital accumulation and total factor productivity growth. We use a panel data set of 78 countries over 35 years (1961-1995) using system GMM for dynamic panels. We correct the standards errors with the Windmeijer (2005) method and use a limited number of instruments. This new methodology improves over the one used in former papers on this subject by making possible to do better inferences and renders invalid former inferences in many papers. We consider four regions Africa, Asia, Europe and North America, and Latin America. We find that financial development in Latin America exhibits a positive effect at the 10% significant level over real per capita GDP growth. We find no evidence of an effect of our financial development measures over physical capital accumulation but there is a positive effect of financial development, measure by liquidity, over total factor productivity growth. Working with an updated database considering 45 years (1961-2005) we find that financial development is not a significant variable over economic growth.