Financial Development and Economic Growth: A Study for OECD Countries in the Context of Crisis

What is it about?

The aim of this paper is to study the relationship between economic growth and the main determinants of financial development in The Organisation for Economic Co-operation and Development (OECD) countries during the period 1990-2016, paying special attention to the recent economic crisis. Using a random effects model, we provide empirical evidence of different aspects of financial development in order to show which of these characteristics of financial development help to explain economic growth in OEDC countries in terms of finances through a panel data model for the period examined. We pay special attention to the main determinants of the financial system and verify their influence on economic growth even when we control for other key country-level factors relating to economic growth. Results show that an increase in domestic credit provided by financial-sector, in market capitalization and in the turnover ratio of domestic shares entails a significant positive effect on the Gross Domestic Product (GDP) per capita. We also find different effects during the period of crisis on domestic credit provided by the financial-sector and on market capitalization. Among other socioeconomic determinants related to economic growth, expenditure in education, the inflation and unemployment rates appear highly significant in the economic growth of the analysed countries.

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