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The nonlinear relationship between economic growth and financial development: Evidence from developing, emerging and advanced economies

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  • Botev, Jaroslava
  • Égert, Balázs
  • Jawadi, Fredj

Abstract

This paper studies the relationship between financial development and economic growth in a large sample of developing, emerging and advanced economies over the recent period. Estimation results based on various nonlinear threshold regression models do not confirm the too-much-finance-is-bad hypothesis. We cannot indeed identify a tipping point beyond which financial development has a clear negative relation to economic development. Our results also show that banking and market finance are complementary. The positive effect of bank credit on growth is larger in stock markets that are deeper. But the thresholds above which complementarity kicks in are rather low level. Finally, the effects of bank and market finance do not seem to depend on economic development and trade openness.

Suggested Citation

  • Botev, Jaroslava & Égert, Balázs & Jawadi, Fredj, 2019. "The nonlinear relationship between economic growth and financial development: Evidence from developing, emerging and advanced economies," International Economics, Elsevier, vol. 160(C), pages 3-13.
    • Handle: RePEc:eee:inteco:v:160:y:2019:i:c:p:3-13
    DOI: 10.1016/j.inteco.2019.06.004
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    Keywords

    Financial development; Economic growth; Nonlinearity; Threshold effects;
    All these keywords.

    JEL classification:

    • C2 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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