Economic Growth and Financial System

Abstract

This document provides empirical evidence about the role of the financial system on the growth of developing economies. In order to prove that relationship a panel data regression using a sample of 26 developing economies for the period 1961-2005 is estimated. Instrumental variables methodology is used for econometric estimations. A positive relationship between financial development and economic growth was found. The estimates suggest that the financial system contributes to increase economic growth by improving investment allocation. Therefore, a properly functioning financial system is a necessary but not a sufficient condition to promote growth in developing economies.

JEL classification: O1 ; O4 ; G2