The relationship between economic growth and financial development in the EU member and candidate countries: Evidence from dynamic and static panel data models

This thesis takes both theoretical and empirical approach to study the relationship between financial development and economic growth. In theoretical part of the study, we examine the development and the motivations behind the theory and analyze the model which explains the link between financial development and economic growth. In empirical part of the study, we investigate the impact of stock markets and banks on economic growth using a panel data set on 29 European Union member and candidate countries for the period 1993-2007. We divide the data set into two sub-groups using the stages of economic development and examine the relation through static and dynamic regression analyses, panel cointegration analyses and causality analyses.Static model regression results indicate that banking development affects economic growth more than stock markets development in developing economies and stock market development affects economic growth more than banking development in developed economies. Dynamic model regression results indicate that stock market development is more efficient both in developing and developed economies. Long run relationship between financial development and economic growth is examined by using Pedroni (1997, 1999) cointegration analysis and results support the existence of the relation. We examined the direction of causality between financial development and economic growth using both Granger (1969) causality and dynamic causality approaches. In developing countries, a bidirectional casual relation exists between banking development and economic growth while there is only a unidirectional relation exists between stock market development and economic growth. In developed countries, the only casual relation exists between stock market development and economic growth.