Abstract:
This paper examines the empirical relationship between financial
development and economic growth for high income countries. The study
focuses on both indirect finance and direct finance, separately as well as
jointly. Applying the methodology of Nair-Reichert and Weinhold (2001)
for causality analysis in heterogeneous panel data, two sets of results are
reported. First, the evidence regarding the relationship between financial
development and economic growth from a contemporaneous non-dynamic
fixed effects panel estimation is mixed. Negative and statistically
significant estimates of the coefficient of the inflation and financial
development interaction variable indicate that financial sector
development may even be harmful to economic growth when inflation is
rising. Second, in contrast with the recent evidence of Beck and Levine
(2003), heterogeneous panel causality analysis applied on a refined model
indicates that there is no definite evidence that finance spurs economic
growth or growth spurs finance. Most of our findings are in line with the
Lucas (1988) view that the importance of financial matters is overstressed.
The only exception is the case of activity in stock markets where
our result supports the Robinson (1952) view that finance follows
enterprise.
