Impact of financial depth and domestic credit on economic growth the case of low and middle income countries from 1995 2014

Problemstatements

Throughout history, economists have extensively debated the factors driving economic growth and the varying levels of development among countries Numerous economic theories have emerged to explain the dynamics of growth across different nations and time periods, highlighting aspects such as capital and labor accumulation, international business expansion, and educational advancements Among the various influences on economic development, financial development stands out as a crucial driver In recent years, there has been a growing focus on the role of financial development in enhancing economic growth globally, especially in the context of international trade and cooperation, where the advancement of financial markets is increasingly valued.

Financiald e v e l o p m e n t a n d i t s e f f e c t o n economicg r o w t h a r e c o m m o n r e s e ar c h o b j e c t i v e s byeconomistsf r o m t h e p a s t t o p r e s e n t t i m e s F o r i n s t a n c e , a c c o r d i n g t o M c K i n n o n ( 1 9 7 3 ) a n d S h a w ( 1 9 7 3 ) , t h e r e i s p o s i t i v e r e l a t i o n s h i p b etw een financialdevelopmentandeconomicgr owth.Besides,Levine(1997)hasp r o v ed t h a t f i n a n c i a l d e v e l o p m e n t c o n t r i b u t e d t o e c o n o m i c g r o w t h t h r o u g h t h e p r o c e s se s o f e n h a n c i n g i n v e s t i n g e n v i r o n m e n t s , minimizingi n v e s t i n g e x p e n s e s , g a t h e r i n g capitalfund s,stimulatingtechnologies,andprovidingriskinsurances.

However,besidesthepositiverelationshipbetweenfinancialdevelopm entandeconomicg r o w t h , someec o n o m i s t s h a v e s t a t e d o t h e r i d e as a b o u t t h e r e l a t i o n s h i p betweenthem.McKinnon(1973),KingandLevine(1993b),Le vine,LoayzaandBeck(2000)havefollowedthefinance-led-growththeory topointout thatiffinancialmarkets wereproperly developed,theycouldenhance t he e conomicg r o w t h r a t e I n c o n t r a s t , G o l d s m i t h ( 1 9 6 9 ) , S h a w ( 1

The growth-led finance theory, as articulated by Jung (1986), suggests that economic improvements drive the demand for financial tools, which in turn fosters the development of financial markets Patrick (1966) identified a reciprocal relationship between financial development and economic growth, indicating that financial advancements significantly impact economic progress from the onset of development As financial services improve, technology upgrades occur, and risks are mitigated, savers benefit from higher savings rates, while investors enjoy greater returns This early phase illustrates how economic growth derives benefits from financial development through capital mobilization Subsequently, as economic growth advances, the demand for financial tools escalates, leading to further financial market development, aligning with the growth-led finance theory in this later stage.

Nevertheless,notallofeconomistssu pp or t theideat h a t there i s p o s i t i v e r e l a t i o n s h i p betweenfinancialdevelopmentandeconomicgrowth.Someaut horss u c h a s R o b i n s o n ( 1 9 5 3 ) d i d n o t a g r e e thatf i n a n c i a l d e v e l o p m e n t playeda n importantpartintheprocessofeconomicgrowth.Inanothercircu mstance,Lucas( 1 9 8 8 ) indicatedthatotherresearchershadoverestimatedth eimpactoffinanciald e v e l o p m e n t oneconomicgrowth.

Recently,a l t h o u g h t h e r e l a t i o n s h i p b e t w e e n f i n a n c i a l d e v e l o p m e n t a n d economicgrowthiswidelyinvestigatedinthecasesofspecificcountri esorgroupso f countries,theconclusionsarestillunderdebate.Likeinthepast

,whilemanyp ap ers supportthepositiveinfluenceoffinancialdevelopmentof economicgrow th , s o m e o t h e r s r e v e a l d i f f e r e n t p o i n t s o f v i e w s C a l d e r ó n a n d L i u ( 2 0 0 3 ) investigateagroupof109countriesduringtheperiodoftimefrom1965to1994a n d c onclude thatfinancialdevelopmentindevelopingcountrieshasgreater effectone c o n o m i c g r o w t h t h a n i n i n d u s t r i a l c o u n t r i e s I n a d d i t i o n , i n t h e i r w o r k i n g p a p e r , C a l d e r ó n a n d L i u ( 2 0 0 3 ) a l s o p o i n t o u t t h a t t h e c h a n n e l s t h r o u g h w h i c h f i n a n c i a l developmentmodifieseconomicgr owthareinvestmentfacilitating andtechnologicalrenovation.I n d e v e l o p i n g c o u n t r i e s , t h e i m p a c t o f f i n a n c i a l d e v e l o p m e n t oneconomicgro wthismorepowerful,however,inindustrialcountries,theeffectofeconomicgrowt honfinancialdevelopmentoutweighs.

ChristopoulusandTsionas(2004)displaythatthemutualrelationshipb e t w e e n financialdevelopmentandeconomicgrowthdoesnotexitinbothshortan dlongrun.However,theyconfirmthatfinancialdevelopmenthasaneffectonecon omicg r o w t h whene s t i m a t i n g t h e d a t a o f 1 0 de v e l o p i n g c o u n t r i e s be t w e e n 1 9 7 0 and2000.

Besidep o s i t i v e p o i n t s o f v i e w s , somee c o n o m i s t p r e s e n t n e g a t i v e i d e a s ab ou t t hec or re la ti on bet wee n f i n a n c i a l de v e l o p m e n t an de c o n o m i c g r o w t h r ate F o r example,LoayzaandRanciere(2006)expresstheirco ncernsaboutthep o ss ib i l i t y thatfinancialdevelopmentcanprovokefinancialcrisis,w hichthenleadt o economicdownturns Inthiscase, financialdevelopmenthasnegativeinfluenceo n economicgrowth.

DeG r e g o r i o a n d G u i d o t t i ( 1 9 9 5 ) , W u , H o u a n d C h e n g (2010),H a s s a n , SanchezandYu(2011)havethesamepointofviewsthattherelationshipbetwee nf i n a n c i a l developmentandeconomicgrowthcanbeambiguous.Allofthemstat ethatt h e wayf i n a n c i a l d e v e l o p m e n t a f f e c t s economicg r o w t h d e p e n d s o n m a n y f a c t o r s s u c h a s t h e q u a l i f i c a t i o n s o f f i n a n c i a l markets,t h e d e v e l o p i n g l e v e l s o f institutions,t h e e v a l u a t i o n s o f f i n a n c i a l advancements,t h e p e r i o d s o f timet h a t r e s e a r c h e s focuson,thegroupsofcountriesthatdataarecoll ected,etc.

Overall,itisobviousthatoneresearchtopiccanbringaboutvariousresearch c o n c l u s i o n s T h e r e l a t i o n s h i p b e t w e e n f i n a n c i a l d e v e l o p m e n t a n d economicgrowthhasbeenwidelyexaminedfromthepasttopresenttime,butthe resultsturnoutto becontroversial.T h e r e are severalfactorsthatleadtod i s s i m i l a r i t i e s Thefirstfactoristheselectionofmeasurementsasdifferentmeasu remen t soffinancialdevelopmentcanbringaboutdifferentresearchresults.T h e secondfact oristhemeansthroughwhicheconomicgrowthisinfluencedbyf i n a n c i a l developme nt.

Therefore,i n v e s t i g a t i n g t h e r e l a t i o n s h i p b e t w e e n f i n a n c i a l d e v e l o p m e n t a n d economicgrowthattractsresearchers’attentionallt hetime.Astheeffectoff i n a n c i a l developmentoneconomicgrowthisclearlydef ined,authoritiescanfindo u t properpoliciesforeconomicgrowthtomakefurtherimprove ment.

The creation and development of financial institutions, stock markets, foreign exchange markets, and bond markets have increasingly complemented the growth of industrial sectors The financial crisis and economic downturns experienced in highly developed countries, such as the United States from 2007 to 2009, inevitably affected financial systems worldwide However, the negative impacts of these crises on economic growth vary across countries, depending on the maturity of their financial systems and the state of their economic growth at the time of the crisis Consequently, examining the effects of financial development on economic growth rates in low and middle-income countries will yield different insights compared to those in high-income countries.

Thiss t u d y c o n c e n t r a t e s o n t h e e f f e c t s off i n a n c i a l d e v e l o p m e n t o n economicgrowthwithselecteddatafromlowandmiddle- incomecountriesb e t w e e n 1 9 9 5 a n d 2 0 1 4 F i r s t l y , manyp r e v i o u s s t u d i e s h a v e f o c u s e d o n t h e connectionb e t w e e n f i n a n c i a l developme nta n d e c o n o m i c g r o w t h B u t d i f f e r e n t r e s e a r c h scopeanddata bring aboutdifferentresearchresults.Therefore,inthis case, d a t a o f 1 2 2 c o u n t r i e s from1 9 9 5 t o 2 0 1 4 a r e c o l l e c t e d tof i n d o u t h o w f i n a n c i a l dev elopmentaf fec ts economicgrowth inthecases o f lowandmi dd le - incomecountries,notinthecasesofhigh-incomecountriesorcountriesingeneral

Secondly,theperiodfrom1995to2014haswitnessedseveralfinancialcrisisandecon omicr e c e s s i o n s A l l f i n a n c i a l s y s t e m s t e n d t o ben e g a t i v e l y a f f e c t e d byf i n a n c i a l c r i s i s a n d e c o n o m i c r e c e s s i o n s , e s p e c i a l l y i n l o w a n d m i d d l e - i n c o m e countries.Moreover,recoverystagesinthesecountriesalsotakealongerperiodoft ime.Asaresult,theregressionresultswillcreatemanyproblemstomakefurtherdiscus sions.Lastbutnot least,aslowandmiddle- incomecountriesaresometimesconsideredtobe developingcountries,levels of developingdoraisesomeotherproblemsrelatingtootherareasthatresearchersshould givesecondthoughtswhenmakingexplanationsandconclusions.

Ingeneral,althoughfinancialdevelopmentandeconomicgrowthhavebeenw i d e l y investigated,analyzingtheimpactsoffinancialdevelopmentoneconomicg r o w t h inthecasesoflowandmiddle- incomecountriesfrom1995to2014willbringaboutinterestingresultswhichcanbe differentfrompreviousresearches.

Researchobjectivesandquestions

Theo b j e c t i v e o f t h i s s t u d y i s t o e s t i m a t e t h e i m p a c t s o f f i n a n c i a l d ev el op men t oneconomicgrowthincountrieswithlowandmiddleincomesfrom1 9

9 5 t o 2014.Moreover, from estimationresults,thestudyw i l l makesomesuggestionstoimprovefinancialdevelopme nt.

Researchscopeanddata

AccordingtotheWorldBank,countriesallovertheworldaredividedintof ou r mainincomegroupsbasingontheirGNI(GrossNationalIncome)percapita in2 0 1 3 T h e f o u r g r o u p s i n c l u d e thelowincome( $ 1 , 0 4 5 o r l e s s ) , t h e l o w e r middleincome($1,046–4,125),theuppermiddleincome($4,126–

(WorldBank).Thisstudyselectsthreeamongfourincomegroupstoestimate:thelow- incomegroup,thelowermiddle-incomegroupa n d t h e u p p e r middle- incomeg r o u p Ino t h e r w o r d s , t h e studye x a m i n e s t w o incomegroupsint otal:thelow-incomegroupandthemiddle-incomegroup.

Thed a t a f o r e s t i m a t i o n a r e c o l l e c t e d fromt h e WorldD e v e l o p m e n t Indicatord a t a b a s e i n t h e o f f i c i a l w e b s i t e o f WorldB a n k W o r l d D e v e l o p m e n t I n d i c a t o r isasetofdatacollectedfromofficialsourcesofinformation.Iti ncludesupdateda n d a p p r o v e d d a t a r e l a t i n g tod e v e l o p m e n t a n d t o t h e e x t e n t s o f b o t h nationsandregions.WorldDevelopmentIndicatorisatimeseriesdat aset,consistsof 2 1 7 c o u n t r i e s a n d i s q u a r t e r l y u p d a t e d A t t h e p r e s e n t , i t c o n t a i n s d a t a f r o m 1960to2015.Inthispaper,dataforestimationarederivedf romGDPpercapitagrowth(annual%),Moneyandquasimoney(M2)

%ofGDP)andG r o s s secondaryenrollmentratio(%),whicharecompiledbyWor ldBankintheWorldDevelopmentIndicator.

Researchstructure

 Chapteronegivesanoverviewoftheresearchproblem,theresearchob jectiv esa n d q u e s t i o n s , t h e r e s e a r c h s c o p e a n d d a t a , a n d t h e r e s e a r c h structure.

 Chapterthreedescribesregression model,measurementso fv ar ia ble s a n d r e s e a r c h methodology.

 Chapterf i v e o u t l i n es analyticalr e s u l t s , p r o p o se s p o l i c y implication s,r e s e a r c h limitationsandsuggestionsforfurtherstudies.

Thefirstchapterbrieflyintroducestherolesoffinancialdevelopmentinthep r o c e s s o f economicg r o w t h a s w e l l a s mentionssomep r e v i o u s theoriesande m p i r i c a l researchesrelatingthisissue.Accordingtopreviouseconomictheories,th ere aremanyfactorsthatinfluencethedevelopmentofeconomicgrowth.Amongthem, financialdevelopmentisconsideredas oneofthe m ost importantstimulat ors.Theimpactsoffinancialdevelopmentoneconomicgrowthhavebeenw i d e ly exa mined,buttheresultsarecontroversial.Thereareseveralfactorsthatl e a d t o d i s s i m i l a r i t i e s T h e f i r s t f a c t o r ist h e s e l e c t i o n o f m e a s u r e m e n t s T h e secondf a c t o r i s t h e meanst h r o u g h w h i c h ec onomicg r o w t h i s i n f l u e n c e d byf i n a n c i a l development.

Moreover,researchobjectivesandquestionsareclearlystated,whichcanb e aneffectiveguideforanyreviews,analysis,conclusionsorpolicyimplicationsp r e s e n t e d inthefollowingchapters.

Theoreticalliterature

Endogenousgrowththeory

Endogenousgrowththeoryoriginatesfromtheneoclassicalgrowththeor ya n d i m p r o v e s t h e p r e v i o u s o n e i n e x p l a i n i n g t h e s o u r c e s a n d d e t e r m i n a n t s o f economicgrowth.Accordingtotheneoclassicalgrowththeory, economicgrowthr a t e i s d e c i d e d bye x o g e n o u s d e t e r m i n a n t s i n v o l v i n g i n t h e p r o c e s s e s ofproductiontechnology,humancapitalaccumulati on,populationgrowth,andsav in g rate.Production technology, humanca pitalaccumulation, populationgrowth , andsavingratearedefinedasexogenou sdeterminantsofeconomicg r o w t h intheneoclassicalgrowththeory.

Inc o n t r a s t w i t h n e o c l a s s i c a l g r o w t h t h e o r y , e n d o g e n o u s g r o w t h t h e o r y explainsthateconomicgrowthoriginatesfrominside factorsofproductionp r o c e s s , n o t f a c t o r s t h a t comefromo u t s i d e A c c o r d i n g t o e n d o g e n o u s g r o w t h theory,e c o n o m i c g r o w t h models t r a i g h t l y e x p l a i n s i t s d e t e r m i n a n t s i t s e l f A s a r e s u l t , determinantsofeconomicgr owthareconsideredasendogenousfactorsinendogenousgrowththeory.

Equation(2.2)canbesubstitutedintoequation(2.1)tocreateanewp ro du ctio n model:

Intheequation(2.4), Aisdefinedasthemarginal productivity ofcap itala n d doesnotdecrease as physicalcapitalgrows.Thisequation alsoimp liesthate n d o g e n o u s growthmodelacceptstheassumptionofconstantreturntoscale.

According to the production function \( y = Ak \), physical capital is a key component of the production process that stimulates human capital accumulation This relationship indicates that production output and physical capital are linearly related, with increased savings and investment rates contributing to higher economic growth The endogenous growth theory suggests that a rise in population growth can negatively impact economic growth rates, highlighting a negative correlation between population and economic growth This theory enhances the neoclassical model by explaining how economic growth can advance in countries that prioritize technological innovations Furthermore, it posits that low-income countries do not necessarily develop faster than high-income countries, as there is no positive correlation between growth and income, challenging the concept of income convergence Ultimately, endogenous growth theory aligns with Solow's views on the critical importance of accumulating production inputs and improving productivity during economic development.

Financialdevelopment andeconomicgrowth

Financiald e v e l o p m e n t i s d e s c r i b e d a s a p r o c e s s t h r o u g h w h i c h f i n a n c i a l i n t e r m e d i a r i e s andfinancialmarketimprovetheirscalesandtheirefficien cy.Thisisaprocesswiththeparticipationofavarietyofinstitutions,instrument s,activities,andpolicies.

Levine( 2 0 0 5 ) s h o w s t h a t f i n a n c i a l d e v e l o p m e n t c o m e s a l o n g w i t h t h e ad v a n c e s infinancialintermediaries,financialinstruments,an dfinancialmarkets.T h e s e financialimprovementsresultinthesavingofavarie tyofcostsincludingi n f o r m a t i o n c o l l e c t i n g , c o n t r a c t e n f o r c i n g , a n d t r a n s a c t i o n c o n d u c t i n g T h e r e du ct io n inbusinesscostsencouragesth erenovationsinallaspectsofbusinessactivitiessuchasresourcedistribution, investingmanagement,capitalcollection,r i s k c o n t r o l , a n d t r a d i n g f a c i l i t a t i o n F u r t h e r m o r e , f i n a n c i a l i n t e r m e d i a r i e s a r e respons iblet o q u a l i f y i n v e s t o r s w i t h f i n a n c i a l t o o l s t o c o n d u c t t h e i r c o r p o r a t e m a n a g e m e n t C o n s e q u e n t l y , f i n a n c i a l d e v e l o p m e n t a f f e c t s s a v i n g a n d i n v e s t i n g d e c i si o n s oftheeconomies,whicharethekeydeterminantso feconomicgrowth.

Thei n c r e a s i n g d e m a n d s f o r t r a n s a c t i o n s a n d b u s i n e s s int h e e c o n o m i e s inevitablyresultintheneedsforthedevelopmentoffinancialmarketsand i n t e r m e d i a r i e s Thankstothefinancialdevelopmentprocess,participantscanc o ll ect essentialinformationabouttheirbusinesspartners,avoidarangeofrisks ,and c o n d u c t theirp a y m e n t s T h e c o m p o s i t i o n o f d i v e r s e marketinformation,b u si n e s s t r a n s a c t i o n s , c o n t r a c t e n f o r c e m e n t s , t o g e t h e r w i t h d i f f e r e n t f i s c a l , monetary,andlegalpoliciesofnu merouscountriesovertheworld,tendtoencouragef i n a n c i a l m a r k e t s a n d f i n a n c i a l i n t e r m e d i a r i e s t o c o n t i n u o u s l y makedevelopmentsandperfe ctthemselvesthroughoutthehistoryofeconomies.

Commercialbankshavebeenconsideredasthemostpopularandimportantf i n a n c i a l institutions.Commercialbanksplaya majorpartintheprocessofg a t h e ri n g free

11 capitalsfromwhereisabundantanddistributingthemtowhereisscarce.Inaddi tion,bankscontributethemselvestosolvetheproblemofasymmetrici n f o r m a t i o n b e t w e e n t h e c a p i t a l h o l d e r s a n d b o r r o w e r s D u e t o t h e presenceo f b a n k i n g s y s t e m s , c a p i t a l s a r e e f f i c i e n t l y a l l o c a t e d a n d s u c c e s s f u l l y investedintheeconomies.AccordingtoMcKinnon(1973),Shaw(1973), Kinga n d Levine(1993a),andLevineetal.

Beforemakinganyi n v e s t i n g d e c i s i o n s , i n v e s t o r s r e q u i r e a g r e a t d e a l o f i n f o r m a t i o n relatingtocorporateoperations,managements,marketsituati ons,etc.Forindividualinvestors,gatheringandanalyzinginformationarenotsimplet askst o c a r r y o u t T h e p r o b l e m o f i n f o r m a t i o n c a n b e s u c h a h i n d r a n c e f o r f i n a n c i a l r eso u r c es tobeeffectivelyallocatedfromwhereareabundanttow hereishighlydemanded(Bagehot,1873).

(1986),havebelievedt h a t highlyd e v e l o p e d financialsystemshelptoeliminatet heexpenditureofcollectinganddealingwithinformation,attractabundantcapital andensurefinancial r e s o u r c e s t o b e e f f i c i e n t l y d i s t r i b u t e d I f t h e r e i s noi n t e r v e n t i o n o f f i n a n c i a l intermediaries,individualinvestors havetospendconsiderableexpensest o a c h i e v e c o r p o r a t e a n d m a r k e t i n f o r m a t i o n A s a r e s u l t , a s y s t e m o f f i n a n c i a l in t e r m e d i a r i e s hasbeenestablishedt osatisfythedemandofinvestors.

Throughtheprocessofdefining,gathering,andanalyzinginformationon c o r p o r a t e o p e r a t i o n s , c o r p o r a t e m a n a g e m e n t , a n d marketc o n d i t i o n s , f i n a n c i a l int er med iari es c o n t r i b u t e t h e m s e l v e s t o t h e developmento f e c o n o m i c g r o w t h

F i n a n c i a l resourcesarelimitedandfinancialsystemshavetheroleofdistributing c a p i t a l topotentialinvestors,ensuringfundallocationtobehighly effectiveintheeconomies(GreenwoodandJovanovic,1990).

Financialintermediaries,tosomeextent,havethecapabilityofrecognizingw h i c h technologiesareessentialforproductionprocessesand assigningsuita ble

12 entrepreneurst o s u i t a b l e t e c h n o l o g i e s T h e r e f o r e , a s K i n g a n d L e v i n e (1993a),Galetovic(1996),Blackburn andHung(1998), Morales(2003), Acemoglu,A g h i o n a n d Z i l i b o t t i ( 2 0 0 3 ) h a v e d i s c u s s e d i n t h e i r w o r k i n g p a p e r s , f i n a n c i a l in ter medi ari es playanimportantpartinthetechnolog icalimprovementprocess.

Financialintermediaries contributethemselvesto theactivitiesoftrad ing,whichincludetheriskhedgingandmanaging.Asaresult,theeconomic growthhastheabilitytodevelop.

Oneo f p r i n c i p a l r o l e s o f f i n a n c i a l marketsi s t o h e d g e a n d managea d i v e r s i f i c a t i o n o f r i s k s I n b u s i n e s s , r i s k s a p p e a r i n e v e r y a r e a s a n d t o e v e r y investors,fromindividualinvestorstoregionalandintern ationalprojectsaswella s c o m p a n i e s T h e e x i s t e n c e o f b a n k s a n d s t o c k marketsi s e x p e c t e d t o h e l p investorstoavoidanddiversifytheirpotentialrisk s.

Financial intermediaries play a crucial role in equipping financial markets with effective risk hedging and diversification tools, which significantly influence capital distribution and savings accumulation The common belief that high-risk projects yield high returns has been supported by historical perspectives from Gurley and Shaw (1955) to modern analyses by Devereux and Smith (1994) and Obstfeld (1994) When investors have access to adequate risk management tools, they are more likely to invest in high-risk projects This dynamic illustrates how financial intermediaries can activate social capital towards promising ventures, enhancing resource allocation and contributing to economic growth.

13 sectionalrisks,riskdiversificationandeconomicgrowth.Intheirworkingpapers,theymak efourimportantassumptions.

Thirdly,less-riskyprojectstendtobringoutless- profitableresults.Lastly,financialresourcesarelimitedintheeconomies.

AsAcemoglua n d Z i l i b o t t i ( 1 9 9 7 ) e x p l a i n int h e i r r e s e a r c h , w i t h o u t t h e p a r t i c i p a t i o n o f f i n a n c i a l i n t e r m e d i a r i e s , i n v e s t o r s a r e n o t e q u i p p e d w i t h risk-h e d g i n g a n d r i s k - m a n a g i n g t o o l s A s a r e s u l t , i n v e s t o r s w o u l d ber e l u c t a n t t o i n v e s t theirmoneyintohigh- riskyprojects,whichwouldbepotentiallyprofitablet o themselves,inparticular,andto thesocieties,ingeneral.

(1997),asfinancialsystemsp r o v i d e e f f e c t i v e f i n a n c i a l a r r a n g e m e n t s , c a p i t a l s a r e e n c o u r a g e d t o movef r o m less-profitableprojectstohigh- profitableactivities.Consequently,savingswouldb e e f f i c i e n t l y reallocat edi n t h e e c o n o m i e s a n d e c o n o m i c g r o w t h r a t e w o u l d b e p o s i t i v e l y boos ted.

King and Levine (1993b) finallyconclude thatthereis a causalrelationshipb et ween thetwovariables:Riskdiversificationsandtechnologicalin novations.Asinvestorsresultininvestingtheirm o n e y i n t o p r o j e c t s w i t h h i g h r e t u r n s , theyindirectlyresultininvestingintothetechnologiesthataredemande dtofacilitatet h o s e projects.Moreover,technologicalimprovementsareregar dedasthekeytosucceedwhenentrepreneursestablishanybusinessinanyarea.Therefor e,aslonga s financialsystemscanprovidefullyeffectiveriskhedgingandmanagin gtools,c a p i t a l h o l d e r s a r e l i k e l y i n v e s t i n g t h e i r m o n e y i n t o b o t h r i s k y b u t p o t e n t i a l l y p r o f i t a b l e a c t i v i t i e s a n d t e c h n o l o g i e s t h a t s u p p o r t t h e i n v e s t e d a c t i v i t i e s A s a result,t h e f u n c t i o n o f r i s k h e d g i n g a n d managingo f f i n a n c i a l i n t e r m e d i a r i e s encourag es t heeconomiestodevelopinbothdirectandindirectways.

Oneo f t h e mostc o m m o n r i s k s t h a t f i n a n c i a l i n t e r m e d i a r i e s h a v e t o d e a l w it h istheproblemofliquidity.Liquidityreferstohowquicklyfinancialass etsc a n b e t r a n s a c t e d a n d c o n v e r t e d i n t o m o n e y int h e markets.Int h e c a s e t h a t liquidityriskstakeplace,assetownersfind itconsiderablydifficulttosell their assetandgettheirmoneybackrightaway.Liquidityrisksareproposedtoresult f r o m thesituationofinformationasymmetriesandtransactionmismatching.

Itisbelievedthatthereisanegativerelationshipbetweenliquidityrisksandeconomicg rowthaslong-term projects normally askf o r long- terminvestments, w h i c h arerankedaslessliquidthanshort- termones.Liquidityisoneofvariousproblemst h a t p r e v e n t i n v e s t o r s t o i n j e c t t h e i r m o n e y i n t o b u s i n e s s a c t i v i t i e s , w h i c h bringoutresul tsinsuchalongrun.

AccordingtoBencivengaandSmith(1991),financialsystemsreduceliquid ityrisks,encouragecapitalholderstoputtheirm o n e y intol e s s - l i q u i d b u t high- returnprojects,whichthencontributetostrengthenthedevelopmentofeconomicgrowt h.

Firstly,capitalmobilizationreducesthetransactioncosts involvingint hep r o c e s s ofcollectingcapitalfromagreatnumberofsavers.

Financialintermediariesareestablishedtoservethetwofunctionsofcapitalmobiliz ation.T h e moree f f e c t i v e l y f i n a n c i a l i n t e r m e d i a r i e s candealw i t h t h e c a p i t a l mobilizingprocess,themoreconsiderablyfinancial systemscancontributet o t h e e c o n o m i c d e v e l o p m e n t t h r o u g h t h e c h a n n e l s o f s t i m u l a t i n g s a v i n g s a n d enforcingeconomiesofscales I n genera l,throughtheprocessofcapital mo b i li z in g , financialintermediariesencourageth ecapitaltogrow,improvecapitaldistribution,stimulate technologicaldevelop ment,and consequently enhanceeconomicgrowth.

Havingfinancialintermediariesascapitalaccumulatingchannels,proje ctsa r e notdiscouragedtolaunchbythelackingofcapital(SirriandTurfano,199 5).Moreover,accordingtoBagehot( 1 8 7 3 ) , t h e s a v i n g s p e r c a p i t a r a t e i s n o t asimportantasthecapabilityofresourceaccumulatinganddistributingintheeconom ies.

Sirria and Tufano (1995) argue that financial intermediaries play a crucial role in mobilizing capital, enabling individuals to invest in high-risk yet potentially high-return projects that they would otherwise be unable to afford By pooling savings from various investors, these intermediaries guide them toward large-scale, profitable activities, thereby fostering positive economic development.

Financialintermediariesareestablishedtoeliminatethehightradingcosts,str engthenthecapitalmobilizing,technologicalaccumulatingandeconomicg r o w i n g p rocesses S i n c e theveryancienttime,AdamSmith(1776)hasinvestigatedthe relationshipamongthet h r e e f a c t o r s : L a b o r s p e c i f i c a t i o n , technologicali mprovementande c o n o m i c growth.Hef i n d s thatlaborspecializationplaysanextrem elyimportantpartinthetechnologicalandeconomicd e v e l o p i n g p r o c e s s e s A c c o r d i n g t o A d a m S m i t h ( 1 7 7 6 ) , i f humanlaborsh a v e chancestospecialize intheirmaintasks,theycancreativelygeneratenewmethodsandnewmeansofprodu ction.

Greenwooda n d S m i t h ( 1 9 9 6 ) d e v e l o p a r e g r e s s i o n m o d e l d e s c r i b i n g t h e correlationa m o n g b u s i n e s s t r a n s a c t i o n s , l a b o r s p e c i a l i z a t i o n , t e c h n o l o g i c a l i m p r o v e m e n t and economicgrowth. Ahigherleveloflaborspecialization leadstoahigherlevelofproductiveefficiencyandbusinessexchanges.Infac t,businessex ch an ges placesomecostsontheinvestors.Therefore,withthepa rticipationoffinan cial intermediariesinthefinancialmarkets,transactioncost scanbereducedtosomeextent.Thankstothis,theproductionandtransactionpro cesseshavethe chancest o g r o w W h e n businesst r a n s a c t i o n b l o w s u p , e c o n o m i c g r o w t h consequently develops.

Greenwooda n d S m i t h ( 1 9 9 6 ) d o n o t c o n c l u d e t h a t l o w e r b u s i n e s s transactioncostsencouragehigherdevelopedproductionprocesses.Theyexplaint h a t l o w e r b u s i n e s s t r a n s a c t i o n c o s t s s t i m u l a t e humanl a b o r s t o b u i l d u p moree f f i c i e n t p r o d u c t i o n p r o c e s s e s Moreover,accordingtoGreen woodandSmith( 1 9 9 6 ) ahighlyrecommendedmarketisconsideredasamarketthatcanstr engthenspecializationintheproductionprocesses.

Entrepreneur management is a key metric that gauges economic growth and financial improvement Investors seek transparency regarding the utilization and allocation of their invested funds The ability of capital holders to effectively manage these investments is anticipated to significantly impact savings and capital distribution behaviors within economies.

Aslongasinvestorshavethepowerstocontroltheinvestedentrepreneursa n d t h e i r i n v e s t e d c a p i t a l s , theya r e n o t r e l u c t a n t t o i n v e s t morea n d m ore.Incontrast, if investorsfindittroublesometotakecontrol ofthe companiesandtheirf u n d s , theywillbeunwillingtomakefurtherinvestmentsandtur ntheirattentionstodifferentinvestingopportunitiesinthefutures(StiglitzandWei ss,1983).Asasequence,themanagementcapabilityofcorporatefinanceandoperationha sa s t r o n g e f f e c t o n t h e p r o c e s s o f c a p i t a l c o l l e c t i n g a n d a l l o c a t i n g , t h e n i m p o s i n g impactontheeconomicgrowthrate.

AccordingtoR.Levine(1997),financialmarketsintroducesomefinancialt o o l s thathelpinvestors tocontrolt he capitalfunds Thefinancial t oo ls inc ludesto ckmarkets,debtcontractsandcommercialbanks.Thesetreefinancialtools,t osomee x t e n t , s u c c e s s f u l l y s o l v e t h e p r o b l e m s o f marketf r i c t i o n s a n d f a c i l i t a t e b u s i n e s s transactions,andsharpenowners’managingpower.

Diamond(1984)estimatestherelationshipbetweenfinancialdevelopme nta n d e n t r e p r e n e u r managementa n d m a k e s a c o n c l u s i o n t h a t f i n a n c i a l i ntermediariesactasa“middleman”whocollectssavingsanddistributet hemtow her eisscarceoffunding butpotentially profitable.This“middle man”reducesthemanaginga n d monitoringc o s t s a s f i n a n c i a l i n t e r m e d i a r i e s s p e c i a l i z e i n t h e managingandmonitoringskillsinsteadofindividualinvestorsthems elves.

Theimpactsoffinancialdevelopmentoneconomicgrowthhavebeenexaminedi n v a r i o u s g r o w t h t h e o r i e s I n n e o - c l a s s i c a l g r o w t h m o d e l , economicg r o w t h i n t h e l o n g r u n i s d e c i d e d b yg r o w t h o f l a b o r f o r c e s a n d t e c h n o l o g i e s B e s id e s , accordingtoneo- classicalgrowth model,economicgrowthintheshortrundependsonsavings Inotherwords,theimpactsoffinancialdevelopmentoneconomicg r o w t h a r e p r o h i b i t e d t h r o u g h s a v i n g s E n d o g e n o u s g r o w t h m o d e l i s t a k e n i n t o a c c o u n t t o i n d i c a t e t h a t f i n a n c i a l developmenti n f l u e n c e s economicg r o w t h throughthechannelsofhumancapitalandtechnologies.Manyresearcherss u c h a s P a g a n o ( 1 9 9 3 ) h a v e mentionede n d o g e n o u s g r o w t h t h e o r y w h e n investigatingtheeffectsoffinancialdevelopmentoneconomicgrowth:

Y t  A t * K t (2.5) Thisproductionfunctionhasconstantreturnstoscaleandincreasingp r o d u c t i v i t y i s a c h i e v e d d u e t o i n c r e a s i n g c a p i t a l s t o c k K , w h i c h c o n s i s t s o f physicalandhumancapital.Inthis productionfunction,popu lationispresumedn o t tohavegrowingrate,andthereisonlyonegoodmanufact uredintheeconomy,whichiscategorizedintoconsumptionsorinvestmentslater.If thegoodi s usedtoinvest,itwilldepreciateinvalueduringtheperiod .Theg r o s s in vestmenthasthefunctionasbelow:

Accordingtotheoreticaldefinition,financialdevelopmenthastheroles ofencouraging s a v i n g s t o c o n v e r t t o i n v e s t m e n t s M o n e y f o r i n v e s t m e n t s isconsideredtobemorevaluablethanmoneyforsavings.Ifrepresents thes a v e d valueo f e a c h u n i t o f m o n e y w h i c h i s s a v e d t o i n v e s t ,

(1)willb e ownedbyfinancialintermediaries.Inacloseeconomy,thevalue ofgrosss a v i n g s isequivalenttothevalueofgrossinvestments:

(2.7)and(2.10),thegrowthrateofst ea d y stateisformulatedasbelow: g  A*(I/Y)  A  s  (2.11) Int h e e q u a t i o n ( 2 1 1 ) ,s denotest h e r a t e o f g r o s s s a v i n g s

Y).T h e eq u at io n ( 2 1 1 ) i n d i c a t e s t h a t t h e r e a r e t h r e e c h a n n e l s t h r o u g h w h i c h f i n a n c i a l d e v e l o p m e n t influenceseconomicgrowth.Thefirstch annelisexpanding ,whichistheratioofsavingstransformedintoinvestments.Gr owthratesofo u t p u t canbeimprovedduetoanimprovementin.Besides,theimprovementin can beachievediffinancialsystemcanstimulatetheprocessofcollectinga n d conver tingi n t o i n v e s t m e n t s Thes e c o n d c h a n n e l i s i n c r e a s i n g A,w h i c h i s thepro ductivityo f c a p i t a l A n i n c r e a s e i n p r o d u c t i v i t y o f c a p i t a l c a n motiv atea n advanceingrowthratesofoutput.Moreover,highproductivityofcapitalc anb e theresultofinvestingsavings inprojectswithhighratesofreturns La stbutn o least,thethirdchannelisheightenings,whichistherateofprivatesavings.

DeG r e gorioa n d G u idotti( 1995)h a v e d e velopedthefunctiony t s t  tto in vestigatethesourcesofgrowth.Inthisfunction,sisthesavingrateandist h e marginal capitalproductivity.AccordingtoDeGregorioandGuidotti(1995),t h e impactso ffinancialdevelopmentoneconomicgrowtharepresentedthrought w o channels:thei mprovementofmarginalcapitalproductivity( t) andthei n c r e a s e ofs a v i n g r a t e s (s t) Additionally,D e G r e g o r i o a n d G u i d o t t i ( 1 9 9 5 ) findoutthefactt hatitisinvestmentefficiencyratherthaninvestmentvolumet h a t stimulatesecono micgrowthrate.

Measurementsof explainingvariables

This study focuses on financial development indicators, specifically the ratio of liquid liabilities to GDP and the ratio of domestic credit to the private sector by banks to GDP Previous empirical studies have included various indicators, such as the ratio of deposit money banks' assets to total assets, stock market capitalization relative to GDP, turnover ratios, and trading values of listed shares However, due to a lack of data, particularly in low and middle-income countries where stock markets are often not established, this study is limited to only two financial development indicators in its regression models.

AccordingtoKingandLevine(1993a),theratioofliquidliabilitiestoGDPis d e f i n e d a s t h e sumo f c u r r e n c y p l u s d e m a n d a n d i n t e r e s t - b e a r i n g l i a b i l i t i e s , w h i c h a r e o w n e d byf i n a n c i a l i n s t i t u t i o n s , d i v i d e d byG D P K i n g a n d L e v i n e (1993a)u s e t h i s i n d i c a t o r t o illu stratew h a t i s c a l l e d ‘ f i n a n c i a l d e p t h ’ o r t h e measurement offinan cialsectorasawhole.Anincreaseinthelevelof‘financiald e pt h ’ impliesanincreas eintheefficiencyofcapitalinvestmentsandariseinthes a v i n g r a t e s , w h i c h r e s u l t s i n a n e x p a n s i o n o f c a p i t a l investments o u r c e s Moreover,agrowthintheratioofl iquidliabilitiestoGDPindicatesagrowthinthecoverageoffinancialinstitutionsintheeco nomy.

Using the ratio of liquid liabilities to GDP as a financial development indicator presents several issues Firstly, it fails to accurately assess the performance of financial intermediaries in addressing information asymmetries and reducing transaction costs Secondly, this ratio primarily focuses on the activity level of financial intermediaries rather than the effectiveness of financial services in efficiently accumulating and distributing capital resources from capital holders to capital demanders A more effective indicator would better reflect the efficiency and effectiveness of financial services in capital allocation.

Intheirworkingpapers,Goldsmith(1969),KingandLevine(1993a) andMcKinnon(1973)havetakenitasgiventhatmeasurementoffinancialsectorhas p o s i t i v e r e l a t i o n s h i p w i t h q u a l i f i c a t i o n s o f f i n a n c i a l s e r v i c e s

A s a r e s u l t , theyhaveusedtheratioofliquidliabilitiestoGDPtocalculatethe‘finan cialdepth’off in an cial systemsintheirresearches.

Inthisstudy,theratioofliquidliabilitiestoGDPisincludedasafinanciald ev e lop ment indicatorthatillustratesthe‘financialdepth’.Thisindicatorisexpect edtobepositive.

DeGregorioandGuidotti(1995),AngandMcKibbin(2007)andNdlo vu( 20 13 )includetheratioofdomesticcredittoprivatesectortoGDPasafinancial d ev el o p m en t i n d i c a t o r i n t h e i r r e s e a r c h e s t i m a t i o n s D o m e s t i c c r e d i t t o p r i v a t e s e c t o r i s d e f i n e d a s t h e l o a n s o f f e r e d t o p r i v a t e i n s t i t u t i o n s bybo th c e n t r a l a n d commercialb a n k s T h i s measurementd o e s n o t i n c l u d e l o a n s o f f e r e d t o p u b l i c institutions.

AccordingtoDeGregorioandGuidotti(1995),AngandMcKibbin(2007)an dN d l o v u ( 2 0 1 3 ) , t h e r a t i o o f domesticc r e d i t t o p r i v a t e s e c t o r t o G

D P c a n illustratehoweffectivelythefinancialsystemswork.Moreover,thismeasurem entc a n i n d i c a t e h o w e f f i c i e n t l y thef i n a n c i a l s y s t e m distributes c a p i ta l r e s o u r ce s i n t h e economy.I n c o m p a r i s o n w i t h t h e r a t i o o f l i q u i d l i a b i l i t i e s t o G D P , w h i c h calculatesthe‘financialdepth’,theratiodomesticcred ittoprivatesectortoGDPi s consideredtobemoresuccessfulincalculatingtheca pitalfundscollectedandal l o c at e d toprivatedemandersbyfinancialintermed iaries.IfthereisanincreaseintheratioofdomesticcredittoprivatesectortoGDP,it meansthatlocalcapitalaccumul ation andinvestmentaregettingimproved,which contributestothed e v e l o p m en t offinancialsector.

The article examines the ratio of domestic credit to the private sector by banks relative to GDP as a key financial development indicator It highlights that this measurement focuses on loans provided by commercial banks to private institutions, which accurately reflects the capacity of the banking system to meet private capital demands The effectiveness of commercial banks in offering loans is crucial for stimulating investments within countries Furthermore, loans to private entities from commercial banks are deemed more efficient and effective compared to those extended to public institutions or by central banks.

Inthisstudy,theratioofdomesticcredittoprivatesectorbybankstoGDPi s i n c l u d e d a s a f i n a n c i a l d e v e l o p m e n t i n d i c a t o r t h a t measurest h e a c t i v i t y o f f i n a n c i a l intermediaries.Thisindicatorisexpectedtobepositive.

Inflationisconsideredasapowerfulmeasurementofeconomicsteadiness.Th er e l a t i o n s h i p b e t w e e n i n f l a t i o n a n d e c o n o m i c g r o w t h h a s b e e n w i d e l y discussed duringthehistoryofeconomicdevelopment.

Mostofeconomists,suchasFisher(1993)andClark(1997),concludethatt h e r e isanegativecorrelationbetweeninflationandeconomicgrowth.Itisexp l a in ed t h a t t h e m o r e t h e e c o n o m y b e c o m e s unsteady,t h e l e s s i t a c h i e v e s econom icdevelopment.

AccordingtoLevineandRenelt(1992),countrieswithhighinflationra terarelya c h i e v e high economic growth.Theye x p l a i n that in thecase of highinflationrate, p ro du ct io n productivity andinvestmentare ne ga ti ve l yinfluenced, a n d preventeconomicgrowthfromincreasing.

Barro(1996)alsoagreesthathighinflationhasanegativeeffectofeconom icgrowthduetohisregressionresultsof100countriesduringtheperiodb e t w e e n 1960and1990.Herevealsthatasinflationrategoes upby10%,GDPg r o w t h ratecanendupwithadropof0.3%peryear.

23 c e s T h e r a t i o o f governmentexp en di tu res to GD Pi s r e g a r d e d a s an in di cat o r fort he p os i t i o n of governmentineconomicgrowthofacountry.

Inmostofe m p i r i c a l studies, government sp en di ng ande c o n o m i c g r o w t h h a sanegativecorrelation.Forexample,Barro(1991)pointedoutthatastherati oo f governmentexpendituretoGDPgoesup,economicdevelopmenttendstoslowd o w n Therearestillsomeeconomistswhofavorthepositiverelationshipbetweengovernmen tspendingandeconomicdevelopmentsuchasRam(1989).

O E C D c o u n t r i e s T h e f i n a l conclusionist ha tf or OE CD c o u n t r i e s , g o ver nm en t co n s u m p t i o n s h a v e p o s i t i v e i n f l u e n c e s o n G D P g r o w t h

Insum,governmentexpendituresarehighlysuggestedtobeadeterminantof economicg r o w t h B e s i d e s , t h e r a t i o o f g o v e r n m e n t f i n a l c o n s u m p t i o n expendituresdividedbyGDPcanbeusedastheproxyfortheeconomicde terminantgovernment expenditures.Theratio ofgovernmentfinalconsumptione x p e n d i t u r e s t o GDP hasthe negativeexpectedsign inthe estimatedmodelofthisstudy.

Theconsiderable impactsoftradeopennessoneconomicgrowth havebeeninvestigatedsincetheneoclassicaltimeofeconomics.Therearesomeverybas ictheoriesrelatingtothe importanceoftradeopennessinthedevelopmentofnationsf r o m someveryfamousecono mistsofmankind.Forinstance,whileAdamSmithd e v e l o p s thetheoryofabsolut eadvantage,DavidRicardoproposesthetheoryofcomparativea d v a n t a g e A f t e r w a r d , H e c k s c h e r –

Ohlini n t r o d u c e a n e w t h e o r y o f internationaltradethatexplainstheprocessinwhic hnationsshouldexportgoodsa n d serviceswithfactorsofproductionthattheyha veabundanceof,andimportwhatconsumesfactorsofproductionthattheyhavescarcity of.

Inempiricalstudies,therelationshipbetweentradeopennessandeconomicgr o wth h a s a t t r a c t e d s u c h a l o t o f a t t e n t i o n A c c o r d i n g t o L e e ( 1 9 9 2 ) , a n o p e n internationaltradep o l i c y h a s morepositiveinfluencesoneconomicgrowthinl o w - d e v e l o p e d countrieswithscarcefactorsofproductionthaninhigh- developedcou ntries w i t h r i c h r e s o u r c e s o f production.I n comparisonw i t h c o u n t r i e s t h a t f o l l o w i n w a r d - o r i e n t e d t r a d e policy,c o u n t r i e s w i t h o u t w a r d - o r i e n t e d t r a d e strategiesachievebettereconomicgrowth.

Yanikkaya( 2 0 0 3 ) s h o w s t h a t t r a d e o p e n n e s s p o l i c y t e n d s toi n f l u e n c e economicgrowththroughspecificchannelssuchastheeconomies ofscaleorthep r o c e s s oftechnologicalexchange,etc.

Recently,M a n n i a n d A f z a l ( 2 0 1 2 ) r e v e a l int h e i r w o r k i n g p a p e r t h a t a con sciou s i n t e r n a t i o n a l t r a d e policyw it h a s u i t a b l e d e g r e e o f o p e n n e s s i s consideredasaprincipalkeydeterminantofeconomicdevelopment.They explainthatitisthelevelofopennessintheinternationaltradestrategyofacountryt hats t r o n g l y influencesthegrowthofexportsandimportsofthatcountrywiththeresto ftheworld.

AccordingtoGriesandRedlin(2012),thepositivecorrelationbetweenfreetr ade p olicyandeconomicgrowthisclearandwidelyacceptedduetothelong- runv iew ofeconomicdevelopment.However,duetotheshort- runofeconomicg r o wt h, insomecases,theopentradestrategycanhurtthecountrie s,especialtheless- developedo n e s Itc a n b e i n f e r r e d f r o m t h e w o r k i n g o f G r i e s a n d R e d l i n ( 2 0 1 2 ) thatthepositivecorrelationbetweentradeopennessandeconomicgro wthi s s t r o n g l y c o n f i r m e d onlyi f t h e c o u n t r i e s h a v e d e v e l o p e d t o a h i g h l e v e l o f d e v e lo p m e nt

Generally,trade ope nn ess is hi gh ly regardeda s asu it ab le determina nto f economicgrowth.TheratioofexportsandimportsdividedbyGDPcanbetake n intoconsiderationastheproxyfortheeconomicdeterminanttradeopenness.Ther a t i o o f e x p o r t s a n d i m p o r t s t o G D P i s e x p e c t e d t o h a v e p o s i t i v e s i g n i n t h e estimatedmodelofthisstudy.

Solow’sg r o w t h modelc o u l d n o t e x p l a i n t h e e f f e c t ofhumanc a p i t a l o n economicgrowthbuttheendogenousgrowththeoriescould.AccordingtoLu cas(1993),t h e p r i m a r y s o u r c e o f economicg r o w t h i s t h e a s s e m b l i n g p r o c e s s o f humancapital.Besides,whatmadethelivingstandardsof countriesdifferentfrome a c h o t h e r w a s a s s e r t e d t o b e t h e d i s t i n c t i o n i n t h e d e v e l o p i n g l e v e l o f humanc a p i t a l Basedontheendogenousgrowththeories, humancapitalispointedouttoh a v e effectofeconomicgrowththroughtwomainchannels: educationandhealth.

The theories of endogenous growth have sparked extensive discussions regarding the relationship between human capital and economic growth Researchers such as Lucas (1988) and Rebelo (1991) emphasized the significance of incorporating human capital alongside physical capital in production processes, advocating for increased government spending on education Barro (2001) analyzed data from 100 countries between 1965 and 1985, revealing a positive correlation between male secondary and higher education enrollment rates and economic growth, while female enrollment did not show the same effect Engelbrecht (2003) later confirmed this positive link between human capital and economic growth through regression analysis of OECD countries Jorgenson and Fraumeni (1992) estimated that human capital accounted for approximately 60% of the annual growth rate in the U.S., while Mankiw, Romer, and Weil (1992) found that human capital contributed nearly 50% to economic growth based on data from 98 countries in 1985.

Normally,humancapitalistakenintoaccountasanimportantdeterminanto f e conomicgrowth.Thetotalenrollmentinsecondaryeducationcandenotethep r o x y fortheeconomicdeterminanthumancapital.Thetotalenrollmentinseconda ryeducationispredictedtohavepositivesignintheestimatedmodelofthisstudy.

Firm management Risk diversification Settlement acceleration Capital accumulation Financial depth intensification Settlement cost minimization

Increase investment volumes and standards Promote savings and investments

Fromtheoreticalandempiricalreviewsoftherolesoffinancialdevelopme nt aswellasthesourcesofgrowth,an analyticalframework diagramisd r a wn toclarifytheimpactsoffinancialdevelopmentaswellasother factorsoneconomicgrowthasabove.

Theanalyticalf r a m e w o r k d i a g r a m d e s c r i b e s t h e r e l a t i o n s h i p a m o n g v a r i a b l e s o f t h e r e g r e s s i o n model.E c o n o m i c g r o w t h i s t h e d e p e n d e n t v a r i a b l e DE PT H andCREDITarefinancialdevelopmentindicator sthatplaytherolesofexplanatoryvariables.Moreover,inflationrate,governme ntexpenditures,exportsa n d i m p o r t s a n d s e c o n d a r y e n r o l l m e n t a r e i n c l u d e d asc o n t r o l v a r i a b l e s o f t h e r e g r e s s i o n model.

Financialdev elopmentind icators growthrate ofreal GDPpercapita

- Goldsmith(1969), McKinnon(1973),Ki ng&Levine(1993a ) , Becketal.(2000)

&Bhattacharya(2011) Manni&Afzal(2012),G ries&Redlin(2012) Lucas(1988), Rebelo (1991),Jorgenson& Fraumeni(1992),Manki w,Romer&Weil(1992), Barro

Empiricalstudies

Thereh a v e b e e n s u c h a l o t o f d i s a g r e e m e n t s a m o n g e c o n o m i s t s o nh o w f i n an ci a l developmenthasimpactsoneconomicgrowth:Isitapositivecorrelatio no r not?

Basingonaregressiondatasampleof35countriesduringtheperiodsfrom1860t o1963,Goldsmithdeclaredthatthesizeoffinancialmarketshadarelativeinfluence o n t h e s i z e o f economicw e l f a r e s A s a r e s u l t , itw a s nod o u b t t h a t finan cialdevelopmentwaspositivelyrelatedtoeconomicgrowth.

However,G o l d s m i t h h a s be e n n o t a b l e top r o v i d e a c r os s - c o u n t r i e s evidenceb e c a u s e t h e r e w a s a l a c k o f d a t a o n s e c u r i t i e s a t t h a t t ime.M o r e o v e r , Goldsmithhadnotexaminedfinancialdevelopmentinassociati onwithp r o d u c t i v i t y g r o w t h a n d c a p i t a l a c c u m u l a t i o n , w h i c h w e r e t h e c e n t r a l p o i n t s o f economictheories.

Itwas u n t i l t h e ageofK i n g a n d L e v i n e ( 1 9 9 3 a ) thatt h e de v e l o p m e n t offinancialmarketsh a d beenc l e a r l y describedthrought h e threeprincipalm e a s u r e m e n t s

P T H i s u s e d tomeasuret h e s i z e o f financiali n t e r m e d i a r i e s D E P T H e q u a l s l i q u i d liabilities,whichincludecurrency,demandandinterest- bearingliabilitiesofb a nk i n g andnon-bankinginstitutions,dividedbyGDP.

The second measurement of financial market development is represented by the term "BANKS," defined by King and Levine (1993a) as bank credit divided by the sum of bank credit and central bank domestic assets This measurement emphasizes the crucial role of banks in providing financial functions, rather than focusing solely on the central bank However, this approach has limitations, as banks are not the only financial institutions offering credit in the economy Additionally, banks extend credit not only to individuals and organizations but also to the government and the public in specific cases.

Thethirdmeasurement thatKingandLevine(1993a)applyinestimati ngthes i ze o f f i n a n c i a l m a r k e ts i s P R I V Y P R I V Y i s de f i n e d as t h e ratioo f c r e d i t p r o v id ed toprivatesectortoGDP.Includingthiselement,theauthorsi

31 mplythatfin an ci al systemswithhighratioofcreditprovidedtoprivatesectortoGDPwoul d beabletoservetheeconomybetterthanfinancialsystemsthatlendmostoftheirf u n d i n g tothegovernmentandthepublicingeneral.

However,t h e s e t h r e e measurementsi n t r o d u c e d byK i n g a n d L e v i n e (1 993a)areclaimedtobenotthedirectproxiesoffinancialmarkets’functions.

SilanesandShleifer(2002)takesintoaccountanotherindicatoro f f i n a n c i a l d e v e l o p m e n t : T h e d e g r e e t o w h i c h b a n k s b e l o n g t o t h e p u b l i c ownership.Afterdoingtheresearch,hemakessomeimportantconclusions.Thefirstconc lusionisthathighdegreeofpublicownershipofbankstendstogotogetherwithlo wleveloffinancialdevelopment.Thesecondconclusionisthath i g h degreeofpublico wnershipofbankscouldpossiblybringoutalowereconomicgrowthresult.

Recently,someeconomiststakeintoconsiderationthecontributionofstockmarket stothedevelopmentoffinancialmarkets.Accordingtoeconomictheories,t h e morel i q u i d e q u i t y marketsa r e , t h e h i g h e r economicg r o w t h , c a p i t a l a c c u m u l a t i o n andproductivitygrowthcangoup.Moreover,bothbanksandstockmarketsare equippedtoraisefundsandprovidefinancialfunctionsfortheeconomy.

LevineandZervos(1998)estimatetherelationshipbetweenstockmark etd e v e l o p m e n t a n d e c o n o m i c g r o w t h , c a p i t a l a c c u m u l a t i o n a n d p r o d u c t i v i t y i m p r o v e m e n t In theirempiricalstudies,LevineandZervos(1998)collectthedatafrom42countriesint heperiodbetween1976and1993.Besideratios implyings t o c k marketdeve lopment,theyalsouseotherpotentialgrowthdeterminantsandincludementioning banksector.

Thes e c o n d r a t i o ist h e s t o c k markets i z e , w h i c h i s a l s o k n o w n a s t h e marketcapitalization According toLevineandZervos(1998),the s tockmarkets i z e doesnotcorrelatewitheconomicgrowthaswellascapitalaccumul ationandproductivityimprovements asmentionedi n some economictheori es.Moreover, marketcapitalizationdoesnotensureanefficientallocationoffinancialresou rces.Schumpeter(1911)revealstheimportanceroleoffinancialdevelopmentineconom icg r o w t h t h r o u g h t h e p r o c e s s e s o f s t i m u l a t i n g i n v e s t m e n t o p p o r t u n i t i e s an d providingfundsthroughthebankingsystemtosatisfy investmentdemandsin theeconomy.

Pagano( 1 9 9 3 ) u s e s a simplem o d e l o f e n d o g e n o u s g r o w t h t o p r o v e t h a t economicgrowth,atitsequilibriumpoint,ispositivelycorrelatedwiththedegree o f savings convertedtoinvestments.Basedon thisrelationship, heasserted thatt h e c o n v e r t i n g p r o c e s s o f s a v i n g s t o i n v e s t m e n t i s o n e o f t h e c h a n n e l t h r o u g h wh ich financialdevelopmentaffectseconomicgrowth.

In 1995, the Ordinary Least Squares (OLS) method was employed, utilizing White's robust procedure for standard error calculations, to analyze the relationship between financial development and economic growth The literature review and empirical regression results indicate that, in most instances, a high level of financial development positively impacts economic growth rates However, during the 1970s to 1980s in Latin American countries, a negative correlation was observed due to poorly regulated financial systems, leading governments to inject funds to bolster their economies.

( 1 9 9 5 ) makesa n agreementt h a t t h e m a i n c h a n n e l t h r o u g h w h i c h f i n a n c i a l d e v e l o p m e n t a f f e c t s economicgrowthistheefficiencyofinvestment,notthedegreeofinvestmentinth eeconomies.

Berthelemya n d V a r o u d a k i s ( 1 9 9 6 ) b a s e s t h e i r r e s e a r c h o n a t h e o r e t i c a l modelwhichincludesbankingsystemoperatinginthebehaviorofCour noto l i g o p o l is t s andreachesaconclusionthateconomicgrowthhasapositiv er e l a t i o n s h i p w i t h t h e n u m b e r s o f b a n k a s w e l l a s h o w c o m p e t e n t l y th e b a n k i n g s y st em actsintheeconomy.

KuntandLevine(1996b)didtheregressionon44countrieswiththedata availablefrom1986to1993andcameupwiththefindingsthateconomicg r o w t h i s p o s i t i v e l y d e p e n d e n t o n t h e d e v e l o p m e n t o f s t o c k m a r k e t I n t h e i r studies,t h e y presentt w o principalreasonsexplainin gwhythereisa positivelinkagebetweentherateofgrowthandthedevelopinglevelofstoc kmarket.Thef i r s t reasonisthatthankstothestockmarket,thechangeoffirmowners hipsdoesn o t terminateoraffecttheoperatingprocessoffirms.Thesecondoneisthatw itht h e s u p p o r t o f s t o c k market,i n v e s t o r s c a n d i v e r s i f y t h e i r i n v e s t i n g p o r t f o l i o s , minimizetheirrisks,managetheliquidityoftheirmoney,wh ichthenencouraget h e m tomoreandmoremaketheinvestments.

Fund)togetherwitharangeoffinancialindextoestimatet herelationshipbetweenfinanci aldevelopmentandeconomicgrowthandcameupw i t h theconclusionthatfinancial developmenthasapositiveinfluenceoneconomicgrowth.However,thatempi ricalstudyrevealedthatthereisanegativee f f e c t o n t h e e c o n o m i c g r o w t h w h e n g o v e r n m e n t i m p o s e s i n t e r v e n t i o n i n t h e financialsystem.

AtjeandJovanovic(1993)didtheresearchonthelinkagebetweenfinancialdevelop mentandeconomicgrowthandfinally foundthatstockmarketdidhavea positiveeffectoneconomicgrowthwhiletherelationshipbetweenbankliabilitiesa n d growthrateofGDPdidnothaveaclearconclusion.

Arestisa n d D e m e t r i a d e s ( 1 9 9 5 ) i n v e s t i g a t e t h e c o r r e l a t i o n b e t w e e n f in an c i al developmentandeconomicgrowthinthetwobigcountrie s:theUnitedS t a t e s andGermany.Withtheregressingmethodsoftimeseriesanal ysis(insteado fcross- sectiond a t a l i k e p r e v i o u s w o r k i n g p a p e r s ) t o g e t h e r w i t h Johansenc o - integrationanalysis,these two authors presenta stronglypositivelinkbetweenthed e v e l o p i n g l e v e l o f financialsystemandthe growingrateof economyinGermanyw h i l e thereisnotaclearoneintheUnitedStates.

(2000)usestheGMMproceduresandIVestimatorstoestimatet h e relationshipbet weenfinancialdevelopmentandeconomicgrowthaswell ast h e correlation betweendevelopingdegreesoffinancialsystemandthesourcesofeconomicg r o w t h t h a t i n c l u d e s a v i n g s i n t h e p r i v a t e s e c t o r s a n d c a p i t a l a c c u m u l a t i n g process.Basedontheestimatedresults,heconcludesthatthereisapo si ti v e c o n n e c t i o n b e t w e e n f i n a n c i a l d e v e l o p m e n t a n d e c o n o m i c g r o w t h : T h e higherl e v e l o f f i n a n c i a l d e v e l o p m e n t a c h i e v e s , t h e h i g h e r l e v e l o f economicg ro wt haccomplish.

A study analyzing data from 44 high-income and low-income countries between 1975 and 1993 indicates a significant positive relationship between banking system development and economic processes such as output assembly, productivity enhancement, and capital accumulation Research by Hsu and Lin (2000) highlights a strong correlation between financial development and economic growth in Taiwan, both in the long run and short run Additionally, utilizing data from 1964 to 1966 and a vector autoregressive error-correction model by Johansen and Juselius (1992), findings demonstrate that both stock market and financial system development contribute to Taiwan's economic growth rate Hsu and Lin (2000) also identify a positive link between the ratio of M2 (broad money aggregate) and GDP, as well as the GDP growth rate Ultimately, the research reveals a Granger causality between financial development and economic growth, with mutual influences observed between these two variables.

Withtheregressionmodeloftimeseriesandthedataoffivehigh- incomecountries,Arestis,Demetriades,andLuintel(2001)assertthatthedevelopme ntofb a n k i n g systemandstockmarkethasapositiveinfluenceontheeconomicgrowth.I n comparisonwiththestockmarketdevelopment,thebankingsystemdev el opm en t h asastrongereffectontheeconomicgrowthrate.

M i n H s u ( 2 0 0 6 ) e s t i m a t e t h e r e l a t i o n s h i p b e t w e e n financialdevelopm entandeconomicgrowthofthethreedevelopedcountries:T a i w a n , K o r e a a n d J a p a n w i t h q u a r t e r l y d a t a a v a i l a b l e inthep e r i o d f r o m 1981to20 13 Theyco ncentrate on th e d e v e l o p m e n t an ds tr uc tu re o f b o t h b an k in g systemandsto ckmarket,monetaryandfiscalpoliciesofthego vern ments, together w i t h thep olicesof i n t e r n a t i o na l capital m o b i l i t y inthose threedevelopedeconomies.

Alejandro( 1 9 8 5 ) d i d t h e r e se a r ch onLatinAmericacountriesandconcludedthatfina ncialliberalizationdidnotinfluenceeconomicgrowththroughthechannelofsaving sandinvestmentasmuchasthechannelofcapitalmarginalproductivity.Saint- Paul(1992)claimedt h a t f i n a n c i a l d e v e l o p m e n t h a s negative effect on thesavingratesasit encouragedtheallocatingprocessofresources.

According to Singh (1997), financial development can sometimes hinder economic growth He identifies three key reasons for this negative impact First, in unstable and unpredictable developing markets, financial systems struggle to effectively allocate capital Second, during financial crises or economic downturns, stock and money markets can disrupt economic stability, undermining potential growth rates Lastly, the growth of stock markets may negatively impact banking systems in developing countries, where the role of banks is crucial and should not be compromised by stock market fluctuations.

The second chapter presents two main sections The first section offers a theoretical review of financial development and economic growth, defining financial development and examining the roles of financial systems in economic growth It discusses theories of financial development and measurements of explanatory variables, highlighting three channels through which financial development influences economic growth: increasing the ratio of savings transformed into investments, improving capital productivity, and raising private savings rates Key financial development indicators include the ratio of liquid liabilities to GDP and the ratio of domestic credit to the private sector by banks to GDP Other economic determinants analyzed are the inflation rate, the ratio of government final consumption expenditures to GDP, the ratio of exports and imports to GDP, and the secondary education enrollment rate The second section summarizes the main findings of previous empirical studies on the relationship between financial development and economic growth Based on these theoretical and empirical reviews, the analytical framework for assessing the impacts of financial development and other economic indicators on economic growth is established.

Model specifications

Manyr e s e a r c h e s a n d p a p e r s h a v e b e e n t a k e n i n t o a c c o u n t t o c r e a t e t h e mostappropriateestimationmodelthatsuccessfullyillustratestheeffect soff i n a n c i a l d e v e l o p m e n t o n e c o n o m i c growth.M o s t o f p r e v i o u s r e s e a r c h e s a n d papersapplytheestimationmethodsofcrosssectionandpanel datatoestimatether e l a t i o n s h i p betweenfinancialdevelopmentandeconomicgrow th.Theestimationmethodo f c r o s s s e c t i o n isn o t highlyr e c o m m e n d e d , as i t c a n n o t c o n t r o l t h e p r o b l e m ofendogeneity.Besides,theestimationmet hodofcrosssectiondoesnotc o n si d e r thedifferentcharacteristicsofeachcountryint heanalyzedobservations.A s aresult,theregressionresultsbroughtbythiscross sectiontechniquecanber e j e c t e d

Becausetheestimationmethodofcrosssectioncannotsolvealltheproble ms,thedynamicpaneldatatechniqueisappliedasanalternative.Unlikethecrosssectionr egressions,theestimationmethodofdynamicpaneldatacantreatt h e problemof endogeneityand takeintoaccountthedifferencesineachcountry’sc a s e M a n y a u t h o r s s u c h a s B e c k a t a l ( 2 0 0 0 ) a n d L e v i n e e t al.( 2 0 0 0 ) h a v e co n d u c t e d t h e d y n am i c paneldatae s t i m a t i o n methodastheye x a m i n e d howfinancialde velopmentandeconomicgrowthiscorrelatedwitheachother.

Thedynamicp a n e l d a t a estimationmodelt h a t d e s c r i b e s t h e i m p a c t s o f f i n a n c i a l developmentoneconomicgrowthhasthegeneralequationasbelow: y it      y i,yi   x it    i    t   it

(3.1) Inthisequation: y itis thegrowthrateofGDPpercapita. y i,yiis thelaggedvaluesofgrowthrateofGDPpercapita. x itconsists offinancialdevelopmentindicatorsandothereconomicgrowthd e t e r m i n a n t s

Toestimatetheimpactsoffinancialdevelopmentoneconomicgrowth,notonlyf inanciald e v e l o p m e n t i n d i c a t o r s b u t a l s o o t h e r economicd e t e r m i n a n t s a r e includedasexplanatoryv a r i a b l e s i n t h e e s t i m a t i o n m o d e l B a s i n g t h e w o r k i n g p a p e r s byK i n g a n d L e v i n e ( 1 9 9 3 b ) , B e c k e t a l

( 2 0 0 0 ) , Loayzaa n d R a n c i e r e ( 2 0 0 6 ) , t h i s studys u g g e s t s s o m e econo micg r o w t h d e t e r m i n a n t s asexplanatoryvariablestoanalyzehowfinanci aldevelopmenthasi n f l u e n c e oneconomicgrowth,whichincludetheinflationra te,theratioofgovernmentexpenditurestoGDP,theratio ofexports andimportstoGDP andthet o t a l enrollmentinsecondaryeducation.Theinflationratedescribesthesteadine sso f macroeconomice n v i r o n m e n t ; t h e r a t i o ofgovernmente x p e n d i t u r e s t o G D P r e v e a l s thechoiceoffiscalpolicybygovernments;theratioofexportsandimpor tstoGDPpresentsthelevelofinternationaltradingexpansions;andthetotalenrollm entinsecondaryeducationsymbolizesthehumancapital.

Derivedfrompreviouslydiscussedtheoretical andempirical w o r k i n g p a p e r s , thegeneralestimationmodelisbuiltuptoestimatetheimpactsoffinanciald ev el o pm en t oneconomicgrowthinthisstudy:

GROWTH it  GROWTH i,t 1  1 FD it  2 INFLATION it  3 GOVER NMENT it  4 TRADE it

RADE iti stheratioofexportsandimportstoGDP.EDUCATION itis thet otalenrollmentinsecondaryeducation.

Datacollection

Thispapercollectsdataof122countries,whichareclassifiedaslowand middle- incomec o u n t r i e s byWorldB a n k T h e s t a n d a r d s f o r c l a s s i f i c a t i o n s a r e countries’G N I ( G r o s s N a t i o n a l Income)p e r c a p i t a C o u n t r i e s w i t h l o w i n c o m e h a v e GNIper capitaat$1, 045or lesswhile countries withmiddle incomehaveGNIp e r c a p i t a b e t w e e n $ 1 , 0 4 6 -

VariablesforestimationincludethegrowthrateofGDP(GROWTH),the ratio ofliquidliabilitiestoGDP(DEPTH),theratioofdomesticcredittoprivate se c t o r bybankstoGDP(CREDIT),theinflationrate(INFLATION),theratioofg overnmentexpenditurestoGDP(GOVERNMENT)andtheratioofexportsandimp ortstoGDP(TRADE).DataforthesevariablesarecollectedfromtheWorldD e v e l o p m e n t IndicatorspublishedbyWorldBank.Datasourcesarementionedint h e foll owingtable:

DEPTH The ratio of liquidliabilitiestoGDP

INFLATION The annual growth rateofGDPdeflator

GOVERNMENT Ther a t i o o f general government finalconsumptionexpe ndituresto GDP

Inflation,GDPdeflator( annual%) Generalgovernmentfin alconsumptionexpendit ures( % o f GDP)

Research methodology

Commonconstantmethod(PooledOLS)

Thec o m m o n co n s t a n t method( P o o l e d OLS)ha s t h e ge n e r a l e q ua t i o n a s

Y it      X it   it (3.4)Inthisequation,Y itis thedependentvariable,X iti s theindependentvariableand itis th eerrorterm.

Thecommonconstantmethod(PooledOLS)takesitforgrantedthattherei s nodifference amongeachelementoftheobservations.Therefore,thismethodw i l l estimateasacons tantforallelementsoftheobservations.

ThePooledOLSestimationhassomelimitations.Firstly,thecoefficientsoft h e const ant andexplaining variableestimatedbythe

PooledOLSestimationhavesomei n s i d e p r o b l e m s T h i s e s t i m a t i o n a s s u m e s t h a t s e r i a l c o r r e l a t i o n d o e s n o t e x i s t andsothere ishomoscedastici tyinthe e rr or termofthemodel.Secondly, b e c a u s e t h e d i s t r i b u t i o n s o f e r r o r t e r m i n t h e o b s e r v a t i o n s a r e a s s u m e d tob e identicalandindepen dent,thequalificationsofpaneldataintheobservationsaren o t clearlyshowed. Thirdly,ascountriesareequallytreatedintheobservations,t h e c o e f f i c i e n t s ofexplainingv a r i a b l e s i n e a c h country’se s t i m a t i o n m o d e l a r e s i m i l a r l y observedandnotaffectedbytime.

Thea b o v e l i m i t a t i o n s cans p o i l t h e e s t i m a t i o n r e s u l t s obtainedbyt h e P o o l ed OLSestimation.Inotherwords,therelationsh ipbetweendependentvariablesandindependentvariablesestimatedbythePoo ledOLSestimationcanber e j e c t e d A s a s e q u e n c e , a p p l y i n g t h e P o o l e d O L S e s t i m a t i o n i n e s t i m a t i n g modelswithpaneldatadoesnotbringaboutthebe stresearchresults.

Fixedeffectsmethod(FEM)

Inthisequation,Y itis thedependentvariable,X iti s theindependentvariableand itis th eerrorterm.

TheFEMestimationtakesitforgrantedthattheslopeisfixedbuttheco efficiento f e x p l a i n v a r i a b l e s canb e d i f f e r e n t i n e a c h c a s e o fcountry.However,thechangeinthecoefficientdoesnotfollowthechangeintime.Th eFEMestimationappreciatesthatcountriesintheobservationsaredifferentfromeachot

43 h er andth ed iffe ren c es o f co u n t ri es ar e describ ed bythei n t e r c e p t

Inthecasethatsomesignificantvariablesarenotincludedintheestimationmodel,th eFEMestimationcantakeintoaccountthisproblem.However,theFEMestimationi s n o t a b l e t o c o n t r o l v a r i a b l e s t h a t a r e f i x e d a l l o v e r t h e timel i k e g e n d e r s , laworigins,politicsystems,religions,etc.

TheFEMestimationcanestimateanobservationofpaneldatawiththe useofd u m m y v a r i a b l e s F o r e x a m p l e , a n o b s e r v a t i o n o f 5 0 c o u n t r i e s w i l l h a v e 49dummy v a r i a b l e s I n t h e c a s e o f b i g o b s e r v a t i o n s , a l a r g e n u m b e r o f d u m m y variableswillbedemandedanditwillbedifficulttoconductt heestimation.

Randomeffectsmethod(REM)

In the context of this equation, Y represents the dependent variable, X is the independent variable, and ε denotes the error term The error term in Fixed Effects Model (FEM) estimation consists of two components: the first accounts for unchanging omitted effects, while the second addresses changing omitted effects In contrast, Random Effects Model (REM) estimation assumes no relationship exists between the unchanging omitted effects and the independent variable Additionally, REM takes into account the unobserved country-specific effects, which are described within the framework of unchanging omitted effects.

Asb o t h c h a n g i n g a n d u n c h a n g i n g o m i t t e d e f f e c t s a r e control ledbyt h e REMestimationintheerrorterm,theREMestimationcanestimatetheva riables thatarenotchangedalloverthetime.Nevertheless,ifthereareomittedvariables,REM willbringaboutunapprovedestimationresults.

Generalizedmethod ofmoments(GMM)

(2000),thelaggedvalueofdependentvariableisincludedintheestimationmodelo f r e l a t i o n s h i p b e t w e e n e c o n o m i c g r o w t h a n d f i n a n c i a l development.Withth eadditionofthelaggedvalueofdependentv ari ab le, theestimationmodelisconve rtedtobethedynamicregressionmodel.

(3.7) Inthisequation: y itis thedependentvariable. y i,yiis thelaggedvaluesofdependentvariable. x itconsists ofindependentvariables.

The estimation of dynamic regression models often faces challenges when using fixed effects (FEM) or random effects methods (REM) due to the correlation between the lagged dependent variable \(Y_{i,t-1}\) and unobserved country-specific effects \(\mu_i\), which can distort results To address these issues, the generalized method of moments (GMM) has been introduced as a more reliable estimation technique for dynamic regression models GMM effectively manages common panel data problems, including autocorrelation, heteroskedasticity, omitted variables, and endogeneity Consequently, the estimation results derived from GMM are regarded as unbiased and consistent.

In the GMM estimation model, the unique characteristics of different countries are represented by an unobserved country-specific effect, denoted as μ The model incorporates the lagged value of the dependent variable, Y_i,t-1, as one of the independent variables, suggesting a relationship with unspecified effects Additionally, the independent variable X_it may also correlate with other unspecified effects included in the error term, ε_it These issues indicate that independent variables in the dynamic regression model may experience endogenous problems Therefore, applying GMM is highly recommended for estimating the regression model effectively.

Asc o u n t r i e s w i t h l o w a n d m i d d l e i n c o m e s t e n d toh e a d f o r e c o n o m i c s t i mu l a t o r s t h a t c a n r a p i d l y t a k e e f f e c t s , i n v e s t i g a t i n g t h e i m p a c t s o f f i n a n c i a l d e v e l o p m e n t oneconomicgrowthintheshort runishighlyrecommendedrathert h a n inthelongrun.Consequently,addingonlyt he1-year- laggedvaluesofGDPgrowthrateinthedynamicregressionmodelofthisstudyis acceptable.Besides,t h e n e e d s f o r l a g g e d v a l u e s o f o t h e r e x p l a i n i n g v a r i a b l e s a n d laggedv a l u e s o f GDPgrowthratein2ormoreyearscanbeputaside.

WhenconductingtheGMMestimation,instrumentalvariablesarerequiredt o fi xtheproblemofendogeneity.Theappropriateinstrumentvariablesaresuggestedtoh averelationshipwiththeendogenousvariablesbutnorelationshipw i t h t h e e r r o r term.A r e l l a n o a n d B o n d ( 1 9 9 1 ) h a v e s u g g e s t e d t h a t t h e l a g g e d v a l u e s o f e n d o g e n o u s v a r i a b l e s a r e t h e s u i t a b l e i n s t r u m e n t a l v a r i a b l e s f o r t h e endogenousvariablesastheyhaverelationshipwiththeendo genousvariablesbutn orelationshipwiththeerrorterm.

Inthisstudy,bothstaticanddynamicregressionmodelwillbeestimated w i t h a p p r o p r i a t e e s t i m a t i o n methods.A l t h o u g h t h e G M M e s t i m a t i o n methodisr e g a r d e d a s t h e mosta p p l i c a b l e f o r p a n e l dataw i t h e n d o g e n o u s p r o b l e m s , t h e

Thethirdchapterintroducesthe researchmethodologiesthatcanbe appliedtof i n d o u t t h e i m p a c t s o f f i n a n c i a l d e v e l o p m e n t o n e c o n o m i c g r o w t h F i r s t l y , fr o m previoustheoreticalandempirical reviews, esti mationmodels canbeestablishedw i t h t w o k i n d s : t h e s t a t i c m o d e l , w h i c h i s e s t i m a t e d byt h e P o o l e d O L S , FEMandREM,andthedynamicmodel,whichis estimatedbytheGMM.Inthecaseofdynamicmodel,the1-year- laggedvalueofGDPgrowthrateisincludedt o c o m p l e t e t h e m o d e l S e c o n d a r y , t h e d a t a c o l l e c t i o n ismentioned,w h i c h clearlyindicatesthesources ofcollecteddataforregression.Lastly,sometheoriesofregressionmethodsforpan eldataarebrieflydescribed,whichincludetheP o o l e d O L S , F E M , R E M a n d G

PooledOLS,FEMorREMa r e onlyu s e d f o r t h e “ RobustnessC h e c k ” T h e r e g r e s s i o n r e s u l t s fromGMM w i l l b e u s e d t o makef i n a l c o n c l u s i o n s a n d p o l i c y i m p l i c a t i o n s i n l a t t e r sections.

Descriptivestatisticsofthesample

Variablename Obs Mean Std.Dev Min

AccordingtoTable4.1,theaveragegrowthrateofrealGDPpercapitainco u n tr ie s withlowandmiddleincomesis2.781%.Besides,manycountrieshaveac h ieved n e g a t i v e g r o w t h r a t e s o f r e a l G D P p e r c a p i t a T h e minimumv a l u e o f a n n u a l growthrateisrecordedat-

62.214%whilethemaximumvalueisrecordedat104.658%.Thehugedifferenceb etweentheminimumandmaximumvalueofa n n u a l growth ratesimplies thateconomic growthrates inlowandmiddle- incomecountriesh a v e s u f f e r e d f r o m m a n y f l u c t u a t i o n s d u r i n g t h e timefrom1 9 9 5 to2 0 1 4 Themainreasoncomesfromthefactthatthetimefrom19 95to2014hasw i t n e s s e d severalf i n a n c i a l c r i s i s a n d economicd o w n t u r n s , w h i c h c o n s i d e r a b l y h a v e damagedeconomicdevelopmentalloverthewo rld,especiallyincountriesw i t h lowandmiddleincomes.

InT a b l e 4 1 , a l l f i n a n c i a l d e v e l o p m e n t i n d i c a t o r s a r e a l s o p o i n t e d o u t t o h av e hugedifferencesbetweentheminimumandmaximumvaluesliket hedependentv a r i a b l e g r o w t h r a t e o f r e a l G D P p e r c a p i t a T h e e x p l a n a t i o n c a n bealsogivenduetotheinstabilitiesandfluctuationsthatfinancialcris isandeconomicdownturnshavebroughtaboutintheperiodoftimebetween1995 and2 0 1 4

Discussingaboutcontrolvariables,thesummarystatisticsofinflationalsoi mpliesthatcountrieswithlowandmiddleincomeshavesufferedalotduringthet i m e bet ween1995and2014.

Thedifferencebetweentheminimumandmaximumv al u e s ofinflationisextremely huge.Moreover,somecountriesevenobtainthen e g a t i v e inflationrates,w hichistheevidenceof instabilitiesandfluctuationsintheeconomicdevelopmentduri ngtheestimationperiod.

Theabovescatterdiagramsdescribehowthedependentvariable(theg r o w t h rateofGDPpercapita)interactswiththeindependentvariables(financiald e v e l o p m e n t indicators),including theratio ofliquid liabilitiesdivided byGDP(

D E P T H ) andtheratioofdomesticcredittoprivatesectorbybanks(CREDIT ).Accor ding tot h e r e s u l t s a c h i e v e d fromt h e i l l u s t r a t i n g d i a g r a m s , i ti s p o s s i b l y co n c l u d ed thattherearenoclearrelationshipbetweenGROWTH andDEPTHorCREDIT.Inotherwords,itisimpossibletodefinitelystatethecorrelationsa mongthedependentvariableandindependentvariablesbasedonthescatterdiagrams.

T H ) a n d c o n t r o l variables(INFLATION,GOVERNMENT,TRADE,EDUCATION)

Theabovescatterdiagramsdescribehowthedependentvariable(thegrowt hrateofGDPpercapita)interactswiththecontrolvariables,includingtheinfla tionrate(INFLATION),theratio ofgovernmentspending dividedbyGD P( G O V E R N M E N T ) , t h e r a t i o o f e x p o r t s a n d importsd i v i d e d byGDP( T R

The analysis indicates a negative relationship between economic growth and inflation, suggesting that rising inflation rates can lead to decreased economic growth Conversely, there is a positive correlation between economic growth and trade, indicating that improvements in international trade, including exports and imports, can enhance economic growth rates Additionally, the relationship between government expenditure and economic growth is slightly negative, implying that increased government consumption may result in a negligible decline in GDP growth Lastly, the data shows no clear link between secondary education enrollment and economic growth, making it difficult to determine how education impacts the growth rate.

Ingeneral,thescatterdiagramssuccessfullycreatesomefirstimpressio nso f thec o r r e l a t i o n a m o n g t h e d e p e n d e n t v a r i a b l e ( e c o n o m i c g r o w t h r a t e ) a n d independentvariables(financialdevelopmentindicatorsa n d c o n t r o l variables).H o w e v e r , t h e p r o b l e m t h a t h o w a n d t o w h i c h e x t e n t t h e i n d e p e n d e n t v a r i a b l e s im p act thedependentvariableisnotclearl ystated.Thatiswhysomepaneldataestimatedmethodshavetobetakenintoconsiderati on.

DEPTH CREDIT STOCK INFLATION GOVERNMENT TRADE EDUCATION

Thetableofcorrelations illustratestheconnectionsamongtheexpla iningv ar i ab l e s Accordingly,itis noticedthat the correlationbetweentheratio ofliquidliabilitiestoGDP(DEPTH)andtheratioofdomesticcredittoprivatesectorby b an k s toGDP(CREDIT)isapproximately0.647.Inotherwords,itisconcluded thatthereisacloserelationshipbetweenthetwofinancialdevelopmentindicatorsD E P

T H andCREDIT.However,thecorrelationsamongindependentvariablesint h e r e s e a r c h m o d e l a r e r e g a r d e d t o bew e a k M o r e o v e r , t h e c o n n e c t i o n s a m o n g financiald e v e l o p m e n t i n d i c a t o r s ( C R E D I T , D E P T H ) a n d c o n t r o l v a r i a b l e s ( I N F L A T I O N , G O V E R N M E N T , T R A D E , E D U C A T I O

N ) a r e alsod e s c r i b e d tob e acceptable.Last butnotleast,VIF hasthevalueof1.45,which isconsidered tob e low.Asaresult,itisreasonabletoconducttheregressionswithalltheexplaining v ariables.

Empiricalresults

Resultso f P o o l e d O L S , F E M a n d R E M t e s t s f o r p a n e l d a t a r e

Table4.3:Resultsof PooledOLS,FEMandREMre gress io n model(Static r e g r e s s i o n model)

Testsf o r t h e s t a t i s t i c a l s i g n i f i c a n c e o f thed i f f e r e n c e b e t w e e n t h e coefficientestimatesobtainedbyFEMandbyREM,underthennul lhypothesisthattheREestimatesareefficientandconsistent,andFEestimatesareinefficie nt.

T e s t i s c o n d u c t e d t o e v a l u a t e t h e s t a t i s t i c a l l y s i g n i f i c a n t c o r r e l a t i o n b e t w e e n theestimatedcoefficientsderivedfromFEMandRE Mregressionmodels.Becausethep- valueoftheHausmanTestapproximatelyequalszero,then u l l hypothesisthatthe REMestimatedresultsareefficientandconsistentcanbep ossi bly rejectedatthesi gnificantlevelof1percentagepoint.Inotherwords,theF E M estimatedresultsareal ternativelyconsideredtobemoreefficientandconsistent.Consequently,t h e F E M r e g r e s s i o n modeli s r e g a r d e d tob e b e t t e r t o a p p l y thantheREM.Ingeneral,theF EMishighlysuggestedasasuitablechoicef o r theregressionmodel.

Accordingt o t h e r e s u l t s o f FEMr e g r e s s i o n m o d e l , t h e e s t i m a t e d co effi ci en ts ofallindependentvariablesarestatisticallysignificant.It meansthatt h e s e financialdevelopmentindicatorsandcontrolvariableshavesomeimpa ctsonthedevelopmentofeconomicgrowthrate.

DiscussionsontheestimationresultsofFEM(Staticregressionmodel)

WiththeestimationofFixedEffectsMethod,RandomEffectsMethodandHau smanTest,FixedEffectsMethodisconsideredtobemoreapplicableforther e g r e s s i o n model.FromthefindingsofFEMregressionresults,theratioofliquidliabilit iestoGDP(DEPTH)andtheratioofdomesticcredittoprivatesectorbyb a n k s ( CREDIT)arestatisticallysignificantandhavenegativecoefficients Itis p o ssi b l y statedthat thefinancialdevelopmentindicatorsDEPTHandCREDITarec o n s i d e r e d tohavene gativeimpactsonthegrowthrateofGDP.

TheregressionresultsofFEMrevealsthattheratioofliquidliabilities toGDP(DEPTH)isstatisticallysignificantandnegativelyinfluencesthedependen tv a r i a b l e G D P g r o w t h r a t e ( G R O W T H ) Thec o e f f i c i e n t o f t h e f i n a n c i a l d e v el o p m en t indicatorDEPTHis–

0.024,whichimpliesthatiftheratioofliquidliabilitiestoGDPgoesupby1percentage point,thegrowthrateofGDPwillgod o w n byroughly-

0.024%incorrespondence AccordingtotheFEMregression r e s u l t s , a n e x p a n s i o n i n t h e l i q u i d l i a b i l i t i e s w i l l c a u s e s o m e t r o u b l e s f o r t h e economicadvance.Thesenegativeeffectsofliquidliabilitiesoffinancialm arketo n economicgrowthratearenotanewissueinthehistoryofeconomicr e s e a r c h e s Forexample, McKinnon(1973),Shaw (1973)andBencivenga etal

( 1 9 9 5 ) a g r e e t h a t i t i s n o t t r u e i f t h e d e e p e n i n g o f f i n a n c i a l marketi s alwaysc o n s i d e r e d t o s u p p o r t t h e d e v e l o p m e n t o f e c o n o m i c g r o w t h A c c o r d i n g toMcKinnon(1973),Shaw (1973) and Bencivengaet al (1995),the negative effectso f liquidliabilitiesratiooneconomicgrowthrateoriginatefromthefactthatcreditpro jectsa r e n o t p r o p e r l y ev al uat ed a n d c r e d i t d e c i s i o n s a r e n o t c a r e f u l l y made.T h e r e f o r e , the efficiencyand effectivenessofsocial funds arenot fullyutilized.

Ino t h e r words,w h e n c r e d i t s a r e p u m p e d t o t h e m a r k e t w i t h o u t c o n t r o l a n d monitoring,theyd o n o t p r o d u c e anyp r o f i t a b i l i t y fo r t h e e c o n o m i c g r o w t h a n d e v e n becomeathreatforfuturelossandbankingfailure.Thisidealisalsosi milart o S i n g h (1997)andraisesawarningforthebadeffectoffinancial marketdeepeningonthegrowthofeconomicadvance.

Besides,theFE M regressionresults alsoillustratethe effectsoffinanc iald e v e l o p m e n t indicatorCREDITon thegrowthrateofGDP.Ifthere is1p ercentage pointincreaseintheratioofdomesticcredittoprivatesectorprovidedbyba nkstoGDP(CREDIT),therewillbeapproximate0.064%fallintheannualg r o w t h r ateofGDPpercapita(GROWTH),correspondingly.Thenegativeimpactsofd omesticcreditt o p r i v a t e s e c t o r p r o v i d e d byb a n k s oneconomicg r o w t h rateinthecasesoflowandmiddle-incomecountriesprovokesomediscussions.

Firstly,despitethefactthatfinancialintermediarieshavebeenincreasinglypu mpingfinancialresourcestoprivatelyownedorganizations,itdoes notplayanyr o l e intheimprovementofcapitalusingproductivity.Besides,t heexpandingofcreditsd o e s n o t e n s u r e t h a t s o c i a l i n v e s t m e n t r e s o u r c e s a r e fullyc o l l e c t e d a n d u t i l i z e d atthehighestrateofreturns.Asaresult,the growthrateofGDPwillbeconsiderablyimpeded.I n th iss it uat io n, f i n a nc i a l i n t e r m e d i a r i e s dono tp ro pe rl y p e r f o r m theirfunctionofeffectivecapitalresource allocation.

Secondly,theratioofdomesticcredittoprivatesectorprovidedbybanksil lustratesthecapacityofbankingsectorforbeingthemiddlemenbetweencapital- suppliersandcapital- demanders.Therefore,itrepresentsonlytheroleofbankingsectori n t h e p r o c e s s o f capitalc h a n n e l i n g I f domesticc r e d i t t o p r i v a t e s e c t o r p r o v i d ed byb a n k s h a s n e g a t i v e e f f e c t s o n economicg r o w t h r a t e , i t isp o s s i b l y impliedth attheprocessofcapitalallocationmayefficientlyandeffectivelytakep l a c e i n o t h e r s e c t o r s insteadofthebankinga r e a T h i s i s t h e r e a s o n whyt h i s f in a n ci al developmentindicatorhasnothingtodowiththegrowthrateofGDPpercapita.Inoth erwords,anincreaseintheratioofdomesticcredittoprivatesectorp r o v i d e d byba nksdoesnotguaranteeariseineconomicdevelopment(Gregorioan d Guitotti,1995).

Creditmarketplaysanimportantroleinprovidingcapitalfundsforinvestme ntprojectstoprocess,andthishelpstoboosttheeconomicgrowthrate.H o w e v e r , inthecasethatcreditfundsarenotproperlymonitoredandmanaged, creditmarketisuselessfortheeconomicgrowthrate.Inworsesituations,capitalf u n d s f r o m c r e d i t marketc a n becomea p o t e n t i a l t h r e a t f o r t h e d e v e l o p m e n t o f economicgrowth.Besides,accordingtoShaw(1973),McKinnon(1973),Pagan o( 1 9 9 3 ) , DeG r e g o r i o a n d G u i d o t t i ( 1 9 9 5 ) , s a v i n g r a t e s a n d i n t e r e s t r a t e s d o n o t followt h e o r e t i c a l r u l e s i f c a p i t a l marketisc o n s i d e r e d tob e i m p e r f e c t I n t h e e n v ir o n m en t oflowcompetitionandweakregulation,a nincreaseinsavingratesand interestratescanbringaboutadecreaseintheeconomicgro wthrate.

Yousif (2002) highlights that economic cycles can negatively impact financial development and, consequently, economic growth rates, particularly in low and middle-income countries In these nations, authorities often struggle to maintain control over financial regulatory systems, leading market participants to prioritize their own interests Financial systems are intended to stimulate economic growth by efficiently collecting and distributing resources from fund holders to those seeking funds However, when financial institutions anticipate government bailouts for poorly performing entities, they may disregard regulations and engage in risky investments, aiming for high returns while neglecting potential capital losses.

A s a r e s u l t , thefunctionofcapitalfundmobilizingandallocatingwillbeundou btedlylost.Whenfinancialintermediariescannotfulfilltheirfunction,economicgr owthr a t e willsufferasignificantfall.

In economic studies, while a positive relationship between economic growth and financial development is commonly accepted, some research indicates a negative link, particularly in Malaysia Ang and McKibbin (2007) found no correlation between economic growth and financial development in the country, which faces challenges such as outdated information systems, high transaction costs, and inefficient capital fund utilization These issues have undermined the effectiveness of financial intermediaries, adversely affecting economic development Additionally, Malaysia's capital allocation policies restrict local fund access, forcing domestic firms to seek external financing, which diminishes the role of local financial intermediaries Furthermore, financial bailouts have pressured the government to impose interest rate restrictions and control financial businesses, negatively impacting the financial sector and investment environment, thus hindering Malaysia's economic growth This situation highlights the weaknesses in the government's financial control policies and their detrimental effects on economic progress.

Theproblemoffinancialintegrationisalsoworthtotakeintoconsider atio n.Inagroupofcountries oraregion,f in anc ia l integrationdoes notalwaysg uaranteeapositiverelationshipbetweeneconomicgrowthandfinanciald e v e l o p m e n t T h e e x t e n t t o w h i c h f i n a n c i a l developmentc a n a f f e c t economicg r o w t h t e n d s t o be decidedbyt h e d e v e l o p i n g l e v e l o f financials y s t e m , t h e steadinessofe conomicenvironment,thestandardsoffinancialsector,aswellast h e strengthand helpfulnessoffinancialpolicy.Inreality,countrieswithlowandmiddleincomesusua llyholdweakerfinancialsystem,looserfinancialcontrol,andmoreinstableeconomicbackgr oundthancountrieswithhighincome.

(2011)revealsthefactthatthereisnotalwaysa n i d e n t i c a l r e l a t i o n s h i p b e t w e e n e c o n o m i c g r o w t h a n d f i n a n c i a l developmenta m o n g agroupofc ountriesorinaspecificregion.Forinstance,thereisanegativer elat io n sh ip betweenthe GDPgrowthrateand theratioofliquidliabilitiestoGDPinCentralAsiacountries,SouthAsiacountries,hig h-developedOECDandhigh- developednon-

OECD.Thisnegativecorrelation revealsthefactthattransaction servicesh a v e b e e n a shortageint h e s e c o u n t r i e s a n d b a n k i n g s y s t e m s h a v e n o t b e e n properlyconducted.Theratioofdomesticcredittoprivatesectorprovided bybanks,however,arepositivelyrelatedtothegrowthrateofGDPinEastAsiaa n d P a c i f i c a n d L a t i n America,b u t t u r n o u t t o b e n e g a t i v e l y r e l a t e d i n C e n t r a l A s i a a n d S o u t h A s i a A s a r e s u l t , i t i s h a r d l y c o n c l u d e d w h a t t h e r e l a t i o n s h i p b e t w e en economicgrowthandfinancialdevelopmentisinthesea reas.Therefore,t o findoutthesignificantindicatorsofeconomicgrowth,resear chersshouldpayattentiont o o t h e r s v a r i a b l e s s u c h a s i n f l a t i o n , g o v e r n m e n t e x p e n d i t u r e s , t r a d e volumeoreducationratherthanfocusonfinanciald evelopmentfactors.

The relationship between financial development and economic growth in low- and middle-income countries has been significantly impacted by financial crises and economic downturns from 1995 to 2014 The instability of financial systems necessitates immediate government intervention to address these challenges; however, the slow response and lack of qualifications among authorities exacerbate the issues Financial intermediaries struggle to recover from unstable economic environments, hindering their ability to contribute to economic recovery Consequently, the connection between financial development and economic growth remains weak, and external factors further diminish the effectiveness of financial systems as drivers of economic development, potentially leading to a negative relationship in these countries.

An increase in banking loans or domestic credit is not always a positive sign Financial intermediaries often provide substantial capital to borrowers without conducting thorough risk evaluations and cash management plans Such negligence can lead to bad debts and potential financial losses, which not only damage the financial system but also impede economic development If the roles of capital allocation and utilization by financial intermediaries are not properly fulfilled, the financial sector can hinder economic progress Consequently, a negative correlation between financial development and economic growth becomes inevitable.

In their 2013 study, Samargandi, Fidrmuc, and Ghosh emphasize the critical issues of financial supervision and capital monitoring, particularly regarding banks' loan decision-making processes They highlight that in an environment characterized by lax financial oversight and inadequate capital monitoring, loans may be granted carelessly, leading to the selection of unsuitable borrowers This situation poses not only a potential risk of loss for financial intermediaries but also threatens broader economic development Ultimately, the authors conclude that financial development can negatively impact economic growth if it results in inefficient and ineffective loan decisions.

DiscussionsontheestimationresultsofGMM(Dynamicregressionmodel)

Accordingt o t h e r e s u l t s o f G M M r e g r e s s i o n model,t h e e s t i m a t e d coefficientsoftheindependentvariablessuchasCREDIT,INFLATION,TRADEa n d EDUCATIONarestatisticallysignificant.Itmeansthatthesefinanciald e v e l o p m e n t i n d i c a t o r s a n d c o n t r o l v a r i a b l e s h a v e s o m e impact so n t h e

62 developmento f economicg r o w t h r a t e Beside,t h e estimatedc o e f f i c i e n t o f th ef i n a n c i a l developmentindicatorDEPTHturnsouttobestatisticallyinsignifi cant.T h e r e f o r e , i n t h e GMMregressionmodel,DEPTHi s consideredto have noinfluenceofthegrowthrateofGDP.

InbothFEMandGMMregressionresults,thefinancialdevelopmentindicator CREDITh a s n e g a t i v e s i g n o f c o e f f i c i e n t a n d s t a t i s t i c a l significanc e.H o w e v e r , t h e s t a t i s t i c a l s i g n i f i c a n c e o f c o e f f i c i e n t isd i f f e r e n t i n t h e c a s e off i n an c i a l d e v e l o p m e n t i n d i c a t o r D E P T H WhileD E P T H h a s statisticalsignificance intheFEMregre ssionresults,itdoesnothaveanystatisticals i g n i f i c a n c e intheGMMregression results.

The financial development indicator, DEPTH, does not impact GDP growth rates, differing from previous FEM regression results Changes in transaction services, represented by DEPTH, have no effect on economic growth, indicating that an increase or decrease in these services does not influence the growth rate of GDP This is attributed to DEPTH reflecting the extent of financial transaction services rather than their efficiency in capital resource management Although transaction services are prevalent, their ineffective utilization means they do not contribute to economic growth This conclusion aligns with findings from various economic studies, including those by Shaw (1973), McKinnon (1973), Bencivenga and Smith (1991), and Wu et al (2010).

AccordingtoGMMregressionresults,thefinancialdevelopmentindicator CREDITisstatisticallysignificantandnegativelycorrelatedwiththegrowthrateo f GDP,whichissimilartotheFEMregressionresults.Therefor,itisconcludedth a t theratioofdomesticcredittoprivatesectorprovidedbybankshasnegativeimp

63 actsont h e GDPgrowthrate.Inp a r t i c u l a r , a s t h e f i n a n c i a l d e v e l o p m e n t indicatorCREDITincreasesby1percentagepoint,theGDPgrowthratetendstod e c r e a s e bya p p r o x i m a t e l y 0 025% T h e n e g a t i v e impactso f d o m e s t i c c r e d i t t o p r i v a t e s e c t o r providedbybanks on economicgrowth ratederivedfromthe GMMestimationaresimilartothosederivedfromtheFEMestimation.

According to Gregorio and Guitotti (1995), an increase in domestic credit to the private sector provided by banks does not always lead to higher economic growth rates This is partly because financial credits can be invested in sectors outside the domestic economy The financial development indicator, CREDIT, reflects the capital resources allocated to private institutions through banking channels, illustrating the investments made by banking systems When financial investments also develop through non-banking channels, the increase in domestic credit from banks may not positively impact GDP growth Additionally, the negative effects of domestic credit on economic growth can be attributed to the efficiency of the investments that this credit generates Even with an expansion of capital resources in the economy, the effectiveness of these resources is not guaranteed Without improvements in saving rates and intensified investment productivity, GDP growth rates remain stagnant Thus, a higher ratio of domestic credit to the private sector relative to GDP can lead to a decline in GDP growth rates.

According to research by Bencivenga, Smith, and Starr (1995), there is a significant relationship between transaction costs, technological choices, financial capital productivity, and GDP growth rates When financial markets face high transaction costs, manufacturers tend to adopt short-term technological methods, which may not hinder immediate economic growth but can impede future development Conversely, if financial markets minimize transaction expenses, manufacturers can invest in long-term technological methods, crucial for enhancing future capital returns Improved liquid liabilities in financial markets can shift capital holders' investment behaviors, encouraging them to focus on more promising financial asset holdings Neglecting technological solutions can lead to operational difficulties in production processes, ultimately hindering business performance and negatively affecting economic growth.

The GMM regression analysis indicates that inflation (INFLATION) significantly negatively impacts GDP growth rate per capita (GROWTH) Specifically, a 1 percentage point increase in the inflation rate correlates with an approximate 0.004% decline in GDP growth per capita Additionally, the ratio of government expenditures to GDP (GOVERNMENT) is statistically significant and also tends to adversely affect the GDP growth rate per capita.

An increase in the ratio of government expenditures to GDP negatively impacts the per capita GDP growth rate, with a GMM regression indicating that a 1 percentage point rise in government consumption relative to GDP results in a 0.081% decrease in growth Conversely, a significant ratio of exports and imports to GDP positively influences GDP growth, suggesting that trade openness is crucial for the economic development of low and middle-income countries Specifically, a 1 percentage point increase in the trade ratio leads to a 0.027% rise in GDP growth Furthermore, the expansion of international trade policies benefits these economies Additionally, total enrollment in secondary education significantly contributes to GDP growth, with a 1 percentage point increase correlating to approximately a 0.014% rise in per capita GDP growth.

D P p e r c a p i t a O v e r a l l , a l l t h e c o n t r o l v a r i a b l e s h a v e statisticals ignificancesandsignsof coefficientsasexpected.Thesefindingsprovet h a t monetaryandfiscalpoliciesinternat ionaltradingstrategieshaveconsiderablei n f l u e n c e s ontheeconomicadvancesofcount ries.

According to GMM regression results, the ratio of domestic credit to the private sector by banks (CREDIT) has a notable impact on GDP growth rates, while the ratio of liquid liabilities to GDP (DEPTH) does not The findings indicate that an increase in capital resources allocated to private institutions by banking systems does not necessarily enhance investment productivity, which can hinder GDP growth in low and middle-income countries Additionally, the deepening of financial markets does not correlate with economic growth rates in these nations Both FEM and GMM regression results suggest that the development of domestic credit to the private sector by banks can negatively affect economic growth.

Forfurtherdiscussions,countrieswithlowandmiddleincomesarehighlys uggestedtopaym o r e attentiontothep r o b l e m s o f p o r t f o l i o d i v e r s i f y i n g , r i s k regulating,costminimizingandinformationsupplyingtostimulatecapitalholderst o in vestmoreandmore.Whentheenvironment ofin ves ti ng is improvedinitse f f i c i e n c y andeffectiveness,investmentwillmakeasubstantialcontributiontotheeconomicgr owthrate.Becausetheefficiencyandeffectivenessofinvestinge n v i r o n m e n t a r e t h e keys t i m u l a t o r s f o r a t t r a c t i n g c a p i t a l f u n d s , t h e e c o n o m i c g r o w t h ratewillbeimpedediftheefficiencyandeffectivenessarenotguaranteedf o r c a p i t a l i n v e s t o r s F o r e x a m p l e , i f t h e e x p e n s e s o f t r a n s a c t i n g a r e n o t e conomical,theriskcontrollingmethodsarenotstrong,ortheinformationsystemsa renottranslucent,capitalfundswillnotobtainthebestproductivityandtheeconomicd evelopmentprocesswillnotbenefitformthem.

Lastbutnotleast,countrieswithlowandmiddleincomesareproposedtot a k e morecon tr ol of t h e economics t e a d i n e s s T he in fl at io nr at e s h o u l d bek ep t u n d e r thoroughexaminationsinallthe time.Moreover, thegovernmentbu dgetsa r e alsorecommendedtospendwithclosesupervision.

Ing e n e r a l , b o t h F E M a n d G M M r e g r e s s i o n r e s u l t s i n t h i s s t u d y r e q u i r e theoriest h a t s u p p o r t t h e negativecorrelationsb e t w e e n e c o n o m i c g r o w t h a n d financial d e v e l o p m e n t t o e x p l a i n a n d s u p p o r t T h e e x p l a n a t i o n s a n d s u p p o r t i n g argumentsm a i n l y originate from e m p i r i ca l st ud ies byBencivenga e t a l.

Asfortheregressionmethods,theFEM andGMMestimation havebee nappliedtoexaminetheimpactsoffinancialdevelopmentoneconomicgrowthint h e caseofcountrieswithlowandmiddleincomes.AlthoughalloftheFEMandGM

M regressionresultscanbeexplainedandsupportedbytheoreticalandempiricalst udies,therearestillsomedifferentiationsintheresultsthatdemandforf u r t h e r though ts T h e r e a s o n p o s s i b l y comesf r o m the c h a r a c t e r i s t i c s of t h e t w o estimati onm o d e l s T h e F E M e s t i m a t i o n c a n n o t s o l v e t h e endogenousp h e n o m e n o n w h i l e t h e G M M c a n o v e r c o m e t h i s p r o b l e m A m o n g e s t i m a t i o n methodsfor paneldata,theGMMmethodisconsideredthemostpowerfultodeal withc o m p l i c a t e d p r o b l e m s s u c h a s thee n d o g e n o u s p h e n o m e n o n o r s i g n i f i c a n t v ar i ab l e omission.

BecauseFEMandGMMaredifferentmethods,theymaybringoutd iff er e n tregressionresults.Thedifferencesthatshouldbetakenintoaccountlieint h e s i d e s o f c orrelation,t h e v a l u e s o f c o e f f i c i e n t s a n d t h e l e v e l s o f s t a t i s t i c a l s i g n i f i c a n c e I n s u m , t h i s s t u d y p r e f e r s t o u s e thee s t i m a t i o n r e s u l t s f r o m t h e G M M e s t i m a t i o n methodt o e x p l a i n t h e i m p a c t s o f f i n a n c i a l d e v e l o p m e n t oneconomicgrowthrateandoffersomesuggestionsforpolic ymakers.

Theforthchapter a n a l y z e s the impactsoffinancialdevelopmenton e conomicgrowthbasingontheregressionresultsoft h e PoolOLS,FEM,REM a n d GMM.Amongthem,theregressionresultsoftheFEMandGMMareselectedto make analysesandexplanations.AccordingtotheFEMregressionresultsofthestaticmodel,wh ichplaytherolesof

The GMM regression analysis reveals that the ratio of domestic credit to the private sector by banks significantly negatively impacts GDP growth, while the ratio of liquid liabilities to GDP shows no meaningful effect in low and middle-income countries Despite the statistical significance of domestic credit, the liquid liabilities to GDP ratio does not demonstrate any influence on economic growth Given the GMM estimation method's effectiveness in addressing endogeneity issues, the regression results will inform the final conclusions and policy implications in the subsequent chapter.

Conclusions

Therelationshipbetweenfinancialdevelopmentandeconomicgrowthha sb e e n widelys t u d i e d inmanyt h e o r e t i c a l a n d empirical researchesa n d raisednumerousp r o b l e m s t o d i s c u s s O n e o f t h e mostc o m m o n d i s c u s s i o n s isw h a t m e a s u r e m e n t s o f financiald e v e l o p m e n t a r e , a n d t h r o u g h w h i c h c h a n n e l s t h a t fi nan ci al developmenthasimpa ctsoneconomicgrowth.

Research on the relationship between financial development and economic growth has led to four main theoretical approaches: supply-leading, demand-following, multi-directional, and no connection These differing perspectives contribute to varied conclusions in the literature, with some studies supporting a positive relationship between financial development and economic growth, while others indicate a negative correlation Additionally, certain research highlights the mutual influence between the two, whereas some papers argue that financial development does not significantly impact economic growth.

The original thinking approach is crucial in determining regression results; however, several factors also demand significant attention These include the standards of financial markets, policy systems, the timeframe for research, and the selection of financial development indicators.

The primary objective of this study is to examine the impacts of financial development on economic growth, utilizing data from 122 countries classified as low and middle-income by the World Bank over a 20-year period from 1995 to 2014 Key financial development indicators analyzed include the ratio of liquid liabilities to GDP (DEPTH) and the ratio of domestic credit to the private sector by banks to GDP (CREDIT) Control variables considered in the analysis encompass the inflation rate (INFLATION), the ratio of government expenditures to GDP (GOVERNMENT), the ratio of exports and imports to GDP (TRADE), and total enrollment in secondary education (EDUCATION) To assess the influence of financial development on economic growth, various regression methods have been applied, including Pooled OLS, Fixed Effects Model (FEM), Random Effects Model (REM), and Generalized Method of Moments (GMM), each providing distinct regression results that are supported by both theoretical and empirical studies.

ThePooledOLS,FEMandREMestimationshavebeen appliedtofindoutt h e mostapplicablemodelfortherelationshipbetweenfinancialdeve lopmentandeconomicgrowth.BasedontheresultsoftheHausmanTest,theFEMreg ressionr e s u l t s areconsideredtobemoresuitabletoexplainhowfinanciald evelopment h as effectsoneconomicgrowth.

AccordingtotheregressionresultsofFEM,financialdevelopmentisconclu dedtoha ve ne g a t i v e i m p a c t s o n thee c o n o m i c g r o w t h ra te Bothr a t i o ofl iq u id liabilities to GDP(DEPTH)and r at io o f domesticcredit topr iv at e sector p r o v i d e d bybankstoGDP(CREDIT)areproposedtobestatisticallysignificant a n d h a v e n e g a t i v e c o e f f i c i e n t s I n o t h e r w o r d s , b a s e d o n t h e F

E M r e g r e s s i o n results,t h e d e e p e n i n g o f f i n a n c i a l marketsa n d e x p a n s i o n o f b a n k i n g c r e d i t s t o p r i v a t e institutionsareconsideredtoobstructthegro wthrateofGDPincountrieswith lowandmiddleincomes.

Comparingt o t h e F E M r e g r e s s i o n r e s u l t s , t h e GMMr e g r e s s i o n r e s u l t s p o i n t outsomedifferentfindings.AccordingtotheGMMregre ssionresults,ther a t i o ofdomesticcredittoprivatesectorbybanks(CREDIT)isstati sticallys i g n i f i c a n t a n d h a s n e g a t i v e c o e f f i c i e n t A s a r e s u l t , t h e f i n a n c i a l d e v e l o p m e n t indicatorCREDITisindicatedtohavenegativeimpactsont h e growthrateofG D P ( G R O W T H ) , w h i c h i s s i m i l a r tot h e f i n d i n g s o f F E

The GMM regression results indicate that the ratio of liquid liabilities to GDP (DEPTH) lacks statistical significance, suggesting that this financial development indicator does not influence GDP growth rates, contrasting with findings from the FEM regression Both FEM and GMM estimations highlight that the development of credit markets for private institutions may hinder economic growth However, the GMM estimation does not classify the deepening of financial markets as an economic stimulant Consequently, the GMM research results imply that financial development negatively impacts the economic growth rate, primarily due to the adverse effects of the financial development indicator, CREDIT, on GDP growth.

ThenegativeimpactsofdomesticcredittoprivatesectorprovidedbybanksonGDP growthrateintheFEMandGMMestimationresultsimplythatfinanciald ev el o p m e n t hasfailedtoencouragetheprocessofeconomicgrowthinlowandmi dd le – incomec o u n t r i e s T h e r e a s o n f o r t h i s f a i l u r e o r i g i n a t e s f r o m t h e explanationt h a t f i n a n c i a l i n t e r m e d i a r i e s h a v e p r o b l e m s i n t h e p r o c e s s o f collectinga n d d i s t r i b u t i n g c a p i t a l f u n d s i n ane f f i c i e n t a n d e f f e c t i v e way.T h e r e f o r e , f i n a n c i a l r e s o u r c e s a r e n o t properlyu t i l i z e d withtheh i g h e s t productivity anddonotcontributetotheenhancementofecono micgrowth.B e s i d e s , theimproperusesoffinancialresourcescreatepotentiallosses andu n av o i dab l e damagesfornotonlythefinancialsectorbutalsothewholeparts ofth ee c o n o m i e s A s a r e s u l t , t h e e x p a n s i o n i n somef i n a n c i a l developme ntindicatorsmaycausenegativeinfluencesonthegrowthrateofGDP.

Countries with low and middle incomes face numerous challenges that hinder their financial development and economic growth Events such as the Asian financial crisis in 1997 and the global economic stagnation in 2010 and 2011 have severely impacted their financial markets These markets are often weak and underdeveloped, making them vulnerable to external shocks Additionally, the inexperience and instability of financial systems, information infrastructures, legal frameworks, and regulatory authorities in these countries limit the effectiveness of financial intermediaries in promoting economic growth.

Generals p e a k i n g , e a c h estimationmethodp r o d u c e s i t s o w n r e g r e s s i o n r e s u l t s andexplanationscanbefoundbasedontheoreticalandempi ricalstudies.I n o t h e r w o r d s , a l t h o u g h t h e c o r r e l a t i o n s betweenf i n a n c i a l development andeconomicgrowthareclearlydescribedbytheFEMandGMMregressionmethods,theore ticalandempirical evidencesarestill requiredto supportand explainforther e g r e s s i o n results.

ManyeconomistssuchasMcKinnon(1973),Shaw(1973),Bencivengaet al.(1995),DeGregorioandGuidotti(1995)andKhalifaAl-

Yousif(2002),havetriedtoexplainthenegativelinkage between financialdevelopmentandeconomicg r o w t h Mostofthosefinancialdevelopmentre searchersagreethatthedeepeningo ffinancialmarketsandtheallocatingofbankloan shavesomeeffectsoneconomicg r o w t h r a t e I f t h e effectst u r n o u t t o b e n e g a t i v e , t h e problemsf o r c o n c e r n aretheefficiencyandeffectivenessoffinan cialmarkets.Inotherwords,financialmarketsdonotproperlyconducttheiroriginalfu nctions.Forexample,ifc a p i t a l fundsarenotsufficientlyassembled,creditrisksare notstrictlyexamined,o r loan- makingd e c i s i o n s a r e n o t p r o p e r l y e v a l u a t e d , t h e f u n c t i o n s o f f i n a n c i a l marketswillbespoiled.Asaresult,theincreaseinfinancialdevelopmentmak esn o a d v a n t a g e s f o r t h e g r o w t h r a t e o f G D P T h e s e e x p l a n a t i o n s a r e a l s o s i m i l a r

( 1 9 8 8 ) haveus ed t o clarifywhytheyc o n c l u d e d thatfinancialdevelopmenthadnoi mpactofeconomicgrowthrate.

Policyimplications

Fromthemainfindingofthe studythatfinancial developmenthas negativeimpactsoneconomicgrowthbasingonthe negativeimpacts ofthe ratioofdomesticc r e d i t t o p r i v a t e s e c t o r byb a n k s toG D P o n G D P g r o w t h r a t e , somep ol ici esareproposed withanaimtocontributetoeconomicgrowth fromachangei n domesticcredittoprivatesectorbybanksinlowandmiddle- incomecountries.

Firstly,countrieswithlowandmiddleincomesshouldpaymoreattentionst o i ncreasingtheefficiencyandeffectivenessofdomesticcredittoprivatesectorb yb a n k s Ino t h e r w o r d s , d o m e s t i c c r e d i t t o p r i v a t e sectorbyba n k s s h o u l d b e d i r e c t e d topropercredittakersandkeptundercloseexaminations.Toaccomplish these goals,theprocessofloandecisionmakingandsupervisingshouldbec a r e f u l l y reformed A s l o n g a s d o m e s t i c c r e d i t i s c o m p e t e n t l y and p r o d u c t i v e l y u t i l i z e d , i t c a n p o s i t i v e l y contribute t o t h e p r o c e s s o f economicd e v e l o p m e n t i n lowandmiddle-incomecountries.

Secondly,theenvironmentofinvestingshouldbeupgradedtoattractmorec a p i t a l f u n d s f o r d o m e s t i c c r e d i t Iti s h i g h l y s u g g e s t e d t h a t thep r o v i s i o n o f translucenti n f o r m a t i o n s y s t e m andminimizingtransactionexpe nsesshouldbemadebyf i n a n c i a l s e c t o r s t o improvet h e e n v i r o n m e n t o f i n v e s t i n g W h e n t h e problemso f i n f o r m a t i o n s y s t e m and t r a n s a c t i o n e x p e n s e s a r e o v e r c o m e , c a p i t a l f u n d s fordomesticcreditwillbevastlyattracted.

Thirdly,incasethesuppliesofdomesticcreditarescareorthe processesofdomesticcredittoprivatesectorbybanksarenotproductiveenough,p o l i cy m a k e r s inlowandmiddle- incomecountriesshouldtakeintoaccountothersuppliesofcapitalfundsf o r domes

Investment),FPI( F o r e i g n PortfolioI n v e s t m e n t ) , g o v e r n m e n t l o a n s, c e n t r a l b a n k l o a n s , e t c M o r e o v e r , i f domesticcreditdoesnotworkwellinprivatesector,policymakersshouldconsidermovethe mtoothersectorswhicharemorecompetentsuchaspublicorforeigninvestmen tsectors.Therefore,thenegativeimpactsofdomesticcredittoprivatesector bybanksoneconomicgrowthratecanbeheldback.

Moreover,someotherrelatingpoliciesshouldbetakenintoconsiderationt o impr ovetheimpactsofdomesticcredittoprivatesectorbybanksoneconomicg ro wth i n c o u n t r i e s w i t h l o w a n d middlei n c o m e s A s s t a t e d byL e v i n e e t a l

(20 00 ), thedifferentiationsinthedevelopmentoffinancialmarketsoriginatefromt h e differentiationsinthelegalsystems,whichcontroltherightsofcreditmakers,th e con t rac ts of l o a n s , and th e s t a n d a r d s o f a c c o u n t i n g , w hic hd eci de the trustwo rthynetworkofcorporateinformation.

Asforthelegalsystems,theirdevelopinglevelcanpositivelysupportthe r i g h t s ofloanmakersandstimulatetheprocessofloansupplying.Besides,highlyd e v e l o p e d legalsystemscaneffectivelyguaranteeloancontractstobecompletelysub jectto,whichishelpfulinencouragingcapitalholderstomakeinvestments.Tos a y i t i n a n o t h e r way,t h e d e v e l o p m e n t o f l e g a l s y s t e m s s h o u l d b e c a r e f u l l y c o n si d er ed as an e f f e c t i v e to ol f o r domesticc r e d i t to e x p a n d a n d b e effectivelyguaranteed.W h e n t h e f u n c t i o n s o f d o m e s t i c c r e d i t a r e p r o p e r l y c o n d u c t e d , a n adv an ce i n f i n a n c i a l d e v e l o p m e n t c a n r e s u l t i n a n i m p r o v e m e n t i n e c o n o m i c g r o wt h ,correspondently.

(2000)haveindicatedthattheyh a v e d i r e c t c o n n e c t i o n s w i t h t h e r a t i o o f do mesticc r e d i t t o p r i v a t e s e c t o r providebybankstoGDP.Apublicandtrust worthynetworkofcorporateinf orm ati on basingonhighly ratedstandardsofaccountingisthekeydeterminanttoa t t r a c t c a p i t a l fundsf o r d o m e s t i c c r e d i t I n a d d i t i o n , e f f i c i e n t a n d e f f e c t i v e standardsofacco untingcansatisfyawiderangeoffinancialinvestorsinsearchingf o r i n v e s t i n g i n f o r m a t i o n A s a r e s u l t , t h e s t a n d a r d s o f a c c o u n t i n g s h o u l d be improvedasaneffectivetoolfordomesticcredittopositivelyinfluenceeconomicg r o w t h

Researchlimitations

Therea r e t w o b i g g e s t limitationsi n t h i s r e s e a r c h F i r s t l y , t h i s r e s e a r c h takesi n t o c o n s i d e r a t i o n onlyt w o f i n a n c i a l d e v e l o p m e n t i n d i c a t o r s w h i l e o t h e r r e s e a r c h e s introducemore.Secondly,theimpactsofsto ckmarketdevelopmentoneconomicgrowtharenotincludedintheestimationmodel. Thesetwolimitationscomef r o m t h e p r o b l e m t h a t d a t a o f l o w a n d middle- incomec o u n t r i e s a r e n o t a v a i l a b l e e n o u g h t o i n c l u d e moref i n a n c i a l d e v e l o p m e n t i n d i c a t o r s i n t h e estimationmodel.Infact,morefinancialdeve lopmentindicatorssuchastheratioo f commercialbankassetstocommercialbanka ssetsandcentralbankassets,ther atio ofstockmarketcapitalizationtoGDP,the ratioofstockmarkettotalvaluetradedtoGDPandtheratioofstockmarketturnoverca nbeputintotheestimationmodeltoanalyzetheimpactsoffinancialdevelopmentonecono micgrowthrateinc o u n t r i e s w i t h l o w a n d middlei n c o m e s H o w e v e r , t h e l a c k o f d a t a makesi t impossibletoconducttheresearch.

Furtherresearches

Therea r e s o m e r e c o m m e n d a t i o n s f r o m t h e l i m i t a t i o n s d i s c u s s e d a b o v e Firstly,itisbetterifsomemorefinancialdevelopmentindicatorsrela tingtostockmarketareincludedintheestimationmodel.Secondly,thisresearchca nanalyzeh o w financialdevelopmentaffectseconomicgrowththroughthesour cesofg r o w t h Lastly,itwillbehighlyrecommendedifthisresearchcaninvestiga tetheo p p o s it e d i r e c t i o n fromw h i c h e c o n o m i c g r o w t h h a s i m p a c t s o n f i n a n c i a l development.I n t h a t c a s e , t h e b i d i r e c t i o n a l c a u s a l i t y betwe ene c o n o m i c g r o w t h andfinancialdevelopmentcanbemorethoroughlyexamin edandtherelationshipb e t w e e n financialdevelopmentandeconomicgrowthwillbecomp letelyobserved.

The fifth chapter summarizes research findings from regression results, indicating that financial development negatively impacts economic growth in low and middle-income countries, particularly through the significant negative influence of the ratio of domestic credit to the private sector by banks on GDP growth rates Based on these findings, the chapter recommends that policymakers focus on enhancing the productivity of domestic credit, improving the investment environment, and adopting flexible capital collection and management strategies to support financial development and economic growth in these regions Additionally, the chapter acknowledges limitations of the study, particularly the lack of data, which poses challenges in estimating the impacts of financial development on economic growth in low and middle-income countries, and suggests areas for further research.

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12 Bolivia 53 Iran,IslamicRep 94 SaoTome&Principle

19 Cape Verde 60 KyrgyzRepublic 101 St.Lucia

20 Cambodia 61 LaoPDR 102 St.Vincent&Grenadines

27 Congo,Dem.Rep 68 Malawi 109 Thailand

28 Congo,Rep 69 Malaysia 110 Timor-Leste

No References Data Methodology Keyconclusions

Paneldataof13Asia ndevelopingcount ries from1990-1998

6 Leitao(2010) Paneldatao f E U co untries andBrazil,Russia,In diaandChina

AugmentedDick ey-Fulleru n i t root testand causalitytest

Panelunitroot t est,FEMandpan elc a u s a l i t y an alysis

Grangercausalit y test,panelu n i t r o o t test and Johansencointeg rationt e s t

Therei s relationshipbetweenfinanc ialdevelopmen t andeconomicgr owth.

There is relationship betweenfinancial development and from1960-2009 cointegrationt e s t economicgrowth.

Therei s relationshipbetweenfinanc ialdevelopmen t andeconomicgr owthi n OECDcountriesb u t i n M E

N A countrieso n l y economicgro wthhasp os i t i v e impactsonfinanci aldevelopment.

Therei s relationshipbetweenfinanc ialdevelopmen t andeconomicgr owthi n m o s t o f countriesb u t i n p oorestcountrieso n l y economicgr owthhasp o s i t i v e impactsonfinan cialdevelopment.

Vectore r r o r co rrection,u n i t r o o t test, cointegrationt e s t , Grangercausalit

Economicgrowthhaspositiveimpa ctsoncreditmarketdevelopmentand thereisrelationshipbetweeneconom icgrowthandstockmarkerdevelop ment.

Therei s relationshipbetweenfinanc ialdevelopmen t andeconomicgr owth.

18 Jude(2010) Paneldataof71count ries from1960-2004

Therelationshipbetweenfinanciald evelopmen t andeconomicgrowth isnotlinearanddependsonfinancial developmentindicators.

Financial positiv egrowth. development hasimpacts on economic