Financial development and economic growth nexus in the MENA countries: Bootstrap panel granger causality analysis

Outline

• Abstract
• Keywords
• 1. Introduction
• 2. Theoretical Framework
• 3. Literature Review
• 4. Measurement of Financial Development
• 5. the Model Specification and Data
• 6. the Method and Findings
• 7. Conclusion
• Acknowledgements
• Appendix A. the Bootstrap Procedure
• Appendix B. Cross-Sectional Dependence Tests
• Appendix C. Results for Bootstrap Panel Granger Causality Test
• References

Conclusions

The relationship between financial development and economic growth has long remained an important issue of debate in the literature. With the emergence of endogenous growth theories which implicitly assume a causal relation from financial development to economic growth, the direction of causality is still an empirical issue.

In this paper, the direction of causality among the variables in question is investigated for the period 1980–2007 for fifteen MENA countries. In order to see the impact of various aspects of financial development, six alternative financial development indicators are used. The method applied here is the recently proposed panel causality testing approach which takes into account cross-sectional dependence across the countries.

The empirical results show that the direction of causality between financial development and economic growth is sensitive to the measurement of financial development in the MENA countries. The findings support evidence on both demand-following and supplyleading hypotheses. Therefore the direction of causality seems to be country and financial development indicator specific. This implies that financial sector and real sector are interrelated to each other in most cases. Economic policies, on the one hand, focus only on the development of the financial sector may not result in economic development where the financial sector follows economic growth in the MENA countries. On the other hand, the financial sector should provide sufficient resources by creating new instruments, institutions and organizations for the demand of real sector with the progress of economic development where the economic growth leads development of the financial sector.

It is the fact that there is a vast diverse figure in terms of financial development in these countries. Some of them have a relatively developed financial sector but others are not. In addition, there is a growing securities market in some of these countries and, therefore, their role in this process should also be taken into account, since this provides another channel of resources for the real sector. This research can be extended to answer the question why there are differences in the financial markets in this region. It is recently argued that legal origin, trade openness, financial integration, deposit insurance, regulatory and supervisory framework, human capital and macroeconomic policies such inflation and budget deficits may have an impact on the development of financial system.