Is financial development crucial for all economies?

Abstract

The relationship between financial development and economic growth has long been recognized and acknowledged in the literature. However, the dynamics of the relationship is yet to be settled, as illustrated by contradictory theoretical and empirical findings. This paper investigates the relationship by splitting 108 countries into sub-groups holding a particular common specificity: level of competitiveness, the legal system, new business entry rate, and income level. Data for this study were collected for 108 countries from a variety of sources for the period 1980 to 2017. Given the large number of countries and periods covered by the study, to control for financial depth without losing country-specific features due to homogeneous aggregation, we employed the Dumitrescu-Hurlin Granger non-causality test to achieve the objectives of this study. The results of the study suggest that financial development plays a significant role for high-income countries, or countries with a high level of innovation, which in turn, correlated with countries with common law legal framework. However, such level of significance could not be established for developing countries.