The effect of financial development on economic growth: An econometric investigation in less developed countries.

Abstract

This thesis investigates the long run relationship between financial development and economic growth, trying to utilize the data in the most efficient manner via panel unit root tests and panel cointegration analysis. Moreover, popular time series methodologies such as the Johansen’s cointegration and Granger causality are employed. The sample consists of 49 countries, the data frequency is annual and the time span ranges from 1970 to 2015. The long run relationship is estimated using fully modified OLS. For 19 out of 49 less developed countries, the empirical results provide support for the hypothesis that there is at least one equilibrium relation between financial depth, growth and ancillary variables. The same result derived from the four panels (World, Asia, Africa and America). In the long run, the panel causality tests point out one-sided causality from finance to growth in the case of Africa and America and a bi-directional causality in the case of Asia and World, while individual countries’ causality tests give contradictory results of the direction of causations