Financial development and economic growth in the Middle East

What is it about?

This paper investigates the linkages between financial development and economic growth in the Middle East using newly developed methods of panel cointegration along with the popular time series methodologies such as the Johansen’s cointegration, Granger causality, and the variance decompositions. The results indicate that, in the long run financial development and economic growth may be related to some level. In the short run, the panel causality tests point to real economic growth as the force that drives changes in financial development while individual countries’ causality tests fail to give a clear evidence of the direction of causations.

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Why is it important?

This paper aims at filling a gap in the research devoted solely to investigating the relationship between financial development and economic growth in the Middle East. Moreover, it makes use of newly developed methods of panel cointegration by Pedroni (1995, 1997 and 2001) and panel FMOLS estimator (Pedroni, 2000) in addition to the popular time series methodologies such as Johansen’s cointegration, Granger causality, and the variance decompositions.