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The dynamics of finance-growth nexus in advanced economies

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  • Swamy, Vighneswara
  • Dharani, Munusamy

Abstract

This study investigates the relationship between finance and economic growth in advanced economies as these countries experience significantly higher levels of financial development. Using a fully balanced panel of 31 years from 1983 to 2013 for 24 economies, we provide new evidence on the finance-growth relationship. We evidence the presence of nonlinearity as there is an inverted U-shaped relationship between finance and growth in the long run. The results show that there exists a threshold effect of the finance-growth relationship estimated at 142 percent of GDP. We find that surpassing the threshold would cost the countries instead of furthering economic growth as too much finance is harmful. Based on the panel Granger causality test results, we argue that financial development should be associated with optimal growth performance. Our findings for the advanced economies provide useful inferences to the emerging and developing economies in designing their financial development strategies.

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  • Swamy, Vighneswara & Dharani, Munusamy, 2019. "The dynamics of finance-growth nexus in advanced economies," International Review of Economics & Finance, Elsevier, vol. 64(C), pages 122-146.
    • Handle: RePEc:eee:reveco:v:64:y:2019:i:c:p:122-146
    DOI: 10.1016/j.iref.2019.06.001
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    Keywords

    Finance; Financial development; Economic growth; Panel data estimation; Dynamic panel threshold; Non-monotonicity;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • O47 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence

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