The role of banking sector on economic growth in European Union and East Asia: Evidence from panel data analysis

ABSTRACT: This thesis empirically investigates the relationship between bank sector and economic growth whereas controlling for the effects of labour and physical capital factors in panel data estimation. Panel data which covers the period 2000 – 2010 by conducting a version of Solow Growth Model for both four European countries and four East Asia countries are used a sample in the thesis. The study mainly aims to determine whether the Bank sector and other relatively important factors stimulate the process of economic growth in the light of exogenous modelling framework by conducting the Panel Co-integration Technique. Estimated results suggest that economic growth in four European countries and four East Asia countries are in long-term equilibrium relationship; banking sector has long-term significant impact on economic growth and therefore economic growth converge to their long-term equilibrium levels through the channels of Capital and labor. However, East Asia countries have not long term and short term economic growth effect when labor and domestic credit are used whereas European countries have not long-term labor growth effect and short term money supply effect. This supports the reality that European countries are more successful in adapting banking system by using money supply as well as domestic credit than East Asia countries. However East Asia countries are more successful in adapting labor and capital policies in short-run than European countries. Therefore, authorities in East Asia countries need to adapt monetary policies effectively in order to increases efficiency through expansion in banking sectors. Keywords: Economic growth, money supply, domestic credit, capital, labor, Solow growth model, panel unit root test, panel co-integration test. …………………………………………………………………………………………………………………………………………………………………………………………………………