The relationship between financial development and economic growth: The issue of nonlinearity

Abstract

Subject. This article explores the relationship between financial development and economic growth. Objectives. The article aims to summarize the results of studies that reveal the statistical properties of the relationship between financial development and economic growth, and test the hypothesis regarding the nonlinear nature of this relationship through empirical research. Methods. For the study, I used analysis, systematization, and the fixed effects model. Results. The article describes the six main mechanisms that cause the effect of nonlinearity of the relationship between finance and growth, and reveals the properties of the nonlinearity of the analyzed relationship in the course of empirical analysis for 43 OECD countries for the period from 1990 to 2019. Conclusions and Relevance. The article concludes that the regulator needs closer control over the loan state and dynamics, and readiness to apply, in appropriate cases, the tactics of slowing down credit expansion. Measures to restore the functionality of financial systems in terms of their role as allocative mechanisms are also important, which follows from the analysis of the sources of nonlinearity of the relationship under consideration. The results of the study can be used by financial regulators when setting targets for the indicators of financial development and formulating policies based on the principle of harmonizing the goals of financial development and economic growth.

The Interaction Between Financial Development and Economic Growth: A Novel Application of Transfer Entropy and Nonlinear Approach in Algeria

“…Moreover, some studies have found a U-shaped or inverted U-shaped nonlinear relationship between (FD) and (EG). For instance, Krinichanskii (2022) identified six mechanisms that cause the nonlinearity of the finance-growth relationship and revealed the properties of this nonlinearity in an empirical analysis of 43 OECD countries from 1990 to 2019. Bahri et al (2018) found that (FD) accelerates (EG) after reaching a turning point, while Bahri et al (2019) showed that FD accelerates growth after a certain level of (FD) is reached.…”