The impact of financial development on economic indicators: a dynamic panel data analysis

Abstract

The study investigates the effect of financial development on major economic indicators, i.e., economic growth, inflation, and employment by applying System GMM estimation technique for a panel of 120 countries for the period 1997 to 2017. Four distinct proxies of financial development are used, i.e., private sector credit, liquid liabilities, money and quasi money, and bank credit. The results contradict the traditional supply-lending hypothesis and reveal negative impact of financial development on economic growth. Moreover, financial development is found to be positively associated with inflation and employment growth. It is suggested that there is need to reform and strengthen the supervision of financial intermediaries to ensure sound prudential lending practices. Furthermore, more credit needs to be allocated to highly productive firms.