A Review of Finance–Growth Nexus Theories: How Does Development Finance Fits in?

Abstract

The finance growth-nexus debates have been contentious over the past three decades both empirically and theoretically. To contribute to this debate, the current paper presents a concise review of finance-growths nexus theoretical development and the current debate around growth-finance nexus theories. Then, it extends the current theoretical debate to include development finance within the broader scheme of finance-growth discourse. The key emerging trend is that, most of the contemporary theories trying to explain finance growth nexus have been exclusively focusing on the standard finance in general. Little attention has been devoted to understand the role of development finance on finance-growth nexus. It concludes that, for a more comprehensive understanding of the finance growth nexus, the role of development finance should be integrated in theory of finance-growth nexus. The paper demonstrates that conventional model of finance-growth nexus is more likely to underestimate the magnitude of the impact of finance on economic growth especially for less developed countries. The paper suggests that, a model which breakdown the finance into standard finance subgroup and development finance subgroup may provide more accurate and insightful findings.