The dynamic impacts of financial institutions on economic growth: Evidence from the European Union

This paper investigates the dynamic impacts of financial institutions on economic growth based on a panel data set comprised of 13 countries in European Union (EU) over the period of 1976-2005. We found several important results. First, there exists a long-run equilibrium relationship among banking development, stock market development and economic development, and stock market capitalization and liquidity have positive long-run effects on economic development. Second, financial depth may have a negative long-run effect on real output, but improving risk diversification and information services of commercial banks results in stable economic development. Finally, stock market liquidity has a negative short-term influence on economic growth.