Financial Development and Growth: A Re-Examination using a Panel Granger Causality Test

In this paper we investigate the causal relationship between financial development and economic growth. We use an innovative econometric method which is based on a panel test of the Granger non causality hypothesis. We implement various tests with a sample of 63 industrial and developing countries over the 1960-1995 and 1960-2000 periods. We use three standard indicators of financial development. The results provide support for a robust causality relationship from economic growth to the financial development. On the contrary, the non causality hypothesis from financial development indicators to economic growth can not be rejected in most of the cases. However, these results only imply that, if such a relationship exists, it can not be easily identified in a simply bi-variate Granger causality test.