The causality between financial development and economic growth: A panel data cointegration

  •  Houssem RACHDI    


The debates on a causality relationship between financial development and economic growth have intensified during these last decades. With this background, the aim of this paper is to examine this causality thesis. If it is acknowledged that financial development stimulates growth, then economic growth may reciprocally stimulate financial development. Financial markets and relevant institutions may shine when the economic growth process induces an increasing demand for financial services which in turn leads to the expansion of the financial sector. This empirical study, conducted on a sample of 10 countries, 6 of which from the OECD region and 4 from the MENA region, over the 1990-2006 period, reports the following results: a panel-based data analysis advocates a long-term relationship between financial development and economic growth for the OECD and the MENA countries. The error correction model approach shows that causality is bidirectional for the OECD countries and unidirectional for the MENA countries, i.e. economic growth stimulates financial development.   

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