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Effect Of Financial Development on Economic Growth in Developed and Developing Economies: Is the Measurement of Financial Development Relevant?

Abstract:

Financial institutions, together with stock markets, actively promote financial development in economies worldwide, which has significantly boosted the economic growth of some countries. By applying cointegration techniques, this study analyzes the long-term relevance between economic growth, financial development, human capital, globalization and primary energy use for a sample of 76 countries during the period from 1980 – 2019. Understanding the possible differences between developed and developing countries, this study shows that financial development in terms of banking institutions contributes significantly to the growth of developing economies, while financial development more oriented to stock markets contributes significantly to the growth of developed economies. The role of human capital is crucial in economic growth, both in developed and developing economies in the long term. On the other hand, globalization in political terms only affects developing economies, which, unlike developed economies, have a lower presence in the rest of countries. Finally, both developing and developed economies still base their growth on the use of primary energy.