FInancial development and economic growth: cross-country comparisons.

Abstract: This study attempts to investigate the relationship between financial development and economic growth and also the empirical analysis examines Granger causality of this relationship. Time series models are applied for six countries with emerging markets and different types of financial system (Saudi Arabia, Kuwait, Tunisia, Morocco, Israel and Egypt).  For the pairwise combinations of financial development indicators and economic growth which do not have cointegrating relationships, Granger causality is applied within the vector autoregressive (VAR) model. When the variables have cointegrating relationship, Granger causality test is applied using the vector error correction model (VECM). The empirical results in the study case suggest that financial structure in some degree can explain economic growth indicator. Moreover the test results show weak dependence between financial development and economic growth. The Granger causality test indicates unidirectional Granger causality running from financial development and economic growth, reverse relationship and bidirectional Granger causality.