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Corresponding Author:
Cândida Ferreira, Lisbon School of Economics and Management, Universidade de Lisboa and UECE – Research Unit in Complexity and Economics, Lisboa, Portugal

Causality Tests between Financial Development and Economic Growth: Empirical Evidence from a Panel Including 46 Countries Spread by all Continents

December 21, 2023
JEL classification: C33; E02; E44; F43; G20; O43
Keywords: Financial Development; Financial Development Indices; Financial Institutions and Markets; Economic Growth; Panel Granger-Causality


This paper contributes to the literature by using the financial development index and sub-indices available in the International Monetary Fund database to test the causal relationship between financial development and economic growth. It applies panel Granger-causality regressions with the approaches developed by Nair-Reichert and Weinhold (2001), Bangake and Eggoh (2011), as well as the Dumitrescu and Hurlin (2012) non-causality test, using the algorithm developed by Lopez and Weber (2017), in a sample including 46 countries spread across all continents over the period 1990-2017. The results obtained confirm the existence of causality running from financial development to economic growth, and, although not with the same statistical robustness, they also confirm the existence of reverse causality running from economic growth to financial development. The empirical findings also demonstrate that there are no significant differences between the results obtained for the sub-indices capturing the different aspects of the development of financial institutions and the development of financial markets. Overall, the paper confirms that the diversities of financial systems across countries require multiple indicators to measure their financial development. In line with the contributions of Sahay et al. (2015) and Svirydzenka (2016), the findings of this study recommend a broad definition of financial development and the use of measures encompassing relevant characteristics of banking and non-banking financial institutions and the financial markets. The paper specifically confirms the importance of the causal relation between economic growth and three specific dimensions of the financial institutions and markets: their size and liquidity (depth), the ability of individuals and companies to access financial services (access), and the ability of the institutions to provide financial services at low costs and with sustainable revenues, as well as the level of activities of the financial markets (the efficiency of the financial institutions and markets).

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Institute for International Economics
of the Genoa Chamber of Commerce

Istituto di Economia Internazionale
Camera di Commercio di Genova
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