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Abstract
This article contributes to the literature on the finance–growth link by presenting new findings based on a new, larger dataset that is an improvement on earlier studies due to its greater coverage in terms of time periods and countries, as well as the incorporation of additional control variables such as institutional quality and the investment rate. Our results demonstrate that financial development does not have a statistically significant effect on economic growth, a finding that is robust to different model specification and estimation techniques. This suggests that the finance–growth link is not as strong as portrayed in the literature, being dependent on the sample of countries and time periods considered.
Notes
An earlier version of this paper was presented at “Bridging the Gap Between Economic Theory and Econometric Practice: A Conference in Honor of James Heckman” held at the Becker Friedman Institute for Research in Economics, University of Chicago (November, 2010). The authors would like to thank Juan Cruz López for his research assistance as well as the editors and reviewers for their helpful comments and suggestions.