Rethinking the impact of GDP on financial development: Evidence from heterogeneous panels

Abstract

This paper examines the nonlinear impact of real GDP per capita on financial development in a panel of 125 countries. It also determines the moderating effect of inflation on the impact of GDP on financial development. It employs the dynamic panel system generalized method of moments (GMM) and the dynamic common correlated effects (CCE) to do both panel and countryspecific analysis, as well as control for cross-sectional dependence, heterogeneity and endogeneity. This study shows that GDP has a positive impact on financial development in the entire panel. However, when we split the panel into different income groups, we find a positive impact in the high-and middle-income groups while the impact is insignificant in the low income group. Although we find no evidence of a nonlinear impact of GDP on financial development in the panel, the country-specific analysis reveals a significant nonlinear relationship between GDP and financial development in 73 countries. We also show that inflation adversely moderates the positive impact of GDP on financial development in middle-income countries. This study implies that the relationship between GDP and financial development depends on the levels of GDP and inflation rate. We recommend some policy options based on the findings.

Assessing the asymmetric effects of capital and money markets on economic growth in China

“…As a general approach to testing the finance–growth nexus, almost all of the recent studies assumed linearity and employed symmetric techniques such as cointegrating regressions, vector autoregressive, vector error-correction, autoregressive distributed lags, Granger causality, and ordinary least squares, whereas a few studies assumed non-linear relationships between the financial system and economic growth and applied asymmetric techniques. These authors are Ehigiamusoe and Narayanan (2019) , Tsagkanos et al. (2019) , and Shodipe and Shobande (2021) , who studied, respectively, in a wide-ranging economic context, Greece, and the U.S., but there is yet no study concerning the asymmetric effects of the financial system on economic growth in China, which is the fastest-growing economy in the world.…”

The nexus between tourism, financial development, and economic growth: Evidence from African countries

“…Odhiambo (2007) found evidence to support the demand‐following hypothesis in Kenya and South Africa, whereas the supply‐leading hypothesis was supported in Tanzania. Gozgor (2015) found a unidirectional causal relationship from economic growth to financial development in 7 countries, and Ehigiamusoe et al (2021) reported that economic growth enhances financial development in 125 countries.…”

“…However, the tourism and financial sectors could be driven by expansion in economic activities, because rapid economic expansion could give rise to tourism infrastructure, education, and safety, which could attract more international tourists and revenue (Tang et al, 2019). Economic expansion could also boost financial development if it causes households and firms to increase their demands for financial products, services, intermediaries, and institutions that prompt the financial sector to embark on innovations and technology to meet the increased demand (Ehigiamusoe et al, 2021; Peia & Roszbach, 2015). This suggests that the causal relationship between financial development and economic growth, as well as between tourism and economic growth could go in either direction.…”

Pengaruh Leverage, Ukuran Perusahaan dan Inflasi terhadap Profitabilitas Pada Bank Umum Syariah di Indonesia

“…Selain itu adanya hubungan antara tingkat inflasi dan pertumbuhan laba pada perusahaan secara signifikan (Ndubuisi, I, & JI, 2019). Tulisan lain menyebutkan bahwa inflasi memiliki efek negatif pada perkembangan keuangan dan profitabilitas perusahaan di negara-negara dengan inflasi tinggi dan menengah (Ehigiamusoe, Guptan, & Narayanan, 2019).…”