FINANCIAL DEVELOPMENT AND ECONOMIC GROWTH: A NEW INVESTIGATION
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This article applies a Bayesian dynamic factor model to examine the relationship between financial development and economic growth from a new angle. We estimate the common, country, and idiosyncratic factors that drive the dynamics and co-movement of financial development and economic growth across 89 countries in three different income groups, namely industrial countries (INDs), emerging market economies (EMEs), and other developing countries (ODCs), over the period 1970 to 2009. The results indicate that the common factor plays a more significant role in explaining the variance of output growth in INDs and EMEs, but not in ODCs. In contrast, financial development variability is mainly driven by the country and idiosyncratic factors. We also analyze the relation between country characteristics and the relative importance of the factors.
Abstract
This article applies a Bayesian dynamic factor model to examine the relationship between financial development and economic growth from a new angle. We estimate the common, country, and idiosyncratic factors that drive the dynamics and co-movement of financial development and economic growth across 89 countries in three different income groups, namely industrial countries (INDs), emerging market economies (EMEs), and other developing countries (ODCs), over the period 1970 to 2009. The results indicate that the common factor plays a more significant role in explaining the variance of output growth in INDs and EMEs, but not in ODCs. In contrast, financial development variability is mainly driven by the country and idiosyncratic factors. We also analyze the relation between country characteristics and the relative importance of the factors.
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