A reevaluation of the impact of financial development on economic growth and its sources by regions

This work estimates the impact of Private Credit to the private sector and Liquid Liabilities (as measures of financial development) on economic growth, capital growth and productivity growth for different regions. Estimations are conducted with a panel database of 78 countries and 35 years using GMM system estimator method for dynamic panel data, correcting by Windme¼er (2005) robust errors and using fewer and relevant instruments compared to the established procedure in the literature of financial development and economic growth. We consider four geographical regions, Latin Amerca, Europe and North America, Asia and Africa. The results with this new methodology, that improves the inference over the usual one used in the literature , suggest a significant effect of financial development in economic growth for the entire panel (for the measue of Liquid Liabilities) and Latin America. We find no evidence of an effect of our financial development measures over physical capital accumulation but there is a positive effect of financial development, measure by liquidity, over total factor productivity growth. The effect of financial development over economic growth is greater in the less developed regions.