THE FINANCE-GROWTH NEXUS IN HIGH AND MIDDLE INCOME ECONOMIES

Abstract

Despite the abundant literature on the causality between financial development and economic growth; little has been said about the shape of this relationship. In this paper we adopt a nonlinear approach to investigate it in the long run for the G7 and the BRICS economies. We use the Svirydzenka (2016) financial development index which takes into account the depth, the access and the efficiency of both financial markets and financial institutions. The results of the bound testing approach suggest the existing of an inverted U-shaped curve relation in the United States, Japan, Germany, Brazil and Russia which confirms that the “too much finance hypothesis” of  Arcand, Berkes and Panizza (2015) not only apply to most high income countries but even to some middle income countries. The U-shaped curve was found in the case of France, the United Kingdom and India. No long run relationship between financial development and economic growth was detected for Italy, Canada, China or South Africa.