Evidence on Economic Growth and Financial Development in Montenegro

Macroeconomic development must be supported by a stable and efficient financial system. There are many different measures of financial development that are suggested when the relationship between growth and financial system is analyzed. In this paper we will identify the most important indicators of the financial development in Montenegro. Due to the fact that in the last decade Montenegrin financial market has been developing, we want to see if that fact had an influence on the economic growth, as well as if there is significant positive relationship between the growth and financial development. The intention of this article is to use principal components in order to examine correlation among indicators and find means or main components. This technique has the advantage of giving more general measures of financial development rather than individual variables for bank or stock market development. It could be concluded that it is difficult to identify the specific components of the financial system most associated with the economic growth.