Financial Development, Economic Performance and Democracy:Methodological Issues and New Estimates

Li, Zhenxiong and Ingham, Hilary (2020) Financial Development, Economic Performance and Democracy:Methodological Issues and New Estimates. Working Paper. Lancaster University, Department of Economics, Lancaster.

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Abstract

This paper investigates the long-term effect of financial development on economic growth using annual data for 67 countries over the period 1971 to 2007. Both autoregressive distributed lag (ARDL) and cross-sectionally augmented autoregressive distributed lag (CS-ARDL) models are applied to count for crosscountry heterogeneity and error cross-country dependence. The results uphold a positive and significant effect of financial development on long-run per capita output. There is also some evidence of a non-linear relationship between financial development and growth. However, the analysis also reveals that the results derive primarily from non-democratic countries.