The Finance and Growth Nexus Re-Examined: Do All Countries Benefit Equally?
A large theoretical and empirical literature has focused on the impact of financial deepening on economic growth throughout the world. This paper contributes to the literature by investigating whether this impact differs across regions and types of economy. Using a rich dataset for more than 130 countries for the period 1975-2005, cross-section and dynamic panel estimation results suggest that the beneficial effect of financial deepening on economic growth in fact displays measurable heterogeneity; it is generally smaller in oil exporting countries; in certain regions, such as the Middle East and North Africa (MENA); and in lower-income countries. Further analysis suggests that these differences might be driven by regulatory/supervisory characteristics and related to differing performance on financial access for a given level of depth.
This paper was presented at the "Financial Deepening, Macro-Stability, and Growth in Developing Countries" conference, held jointly by the International Monetary Fund, the World Bank, the Consortium on Financial Systems and Poverty, and the UK Department for International Development in September of 2012. The corresponding presentation is also available.