Further evidence on finance-growth causality: A panel data analysis

This paper reassesses the causal relationship between financial development and economic growth. Using recently developed panel methods on a data set of 71 developed and developing countries over the period 1960-2004, our study confirms previous results of a bidirectional causality between finance and growth. In addition, we show significant differences among country groups when considering both long-run and short-run causality. While in low and middle income countries there is no supportive evidence of short-run causality between financial development and economic growth, in high income countries economic growth significantly affects financial development.

Research highlights► This paper reassesses the causal relationship between financial development and economic growth. ► We use recently developed panel methods on 71 countries over the period 1960-2004. ► Our study confirms bidirectional causality between financial development and growth. ► Furthermore, our results show significant differences among country groups when considering both long-run and short-run causality.