The empirical literature exploring the finance-growth nexus has employed a plethora of proxies to measure financial development. However, many of the measures of financial development employed so far lack theoretical coherence and appear to be ad-hoc in nature, leading to disparate and seemingly irreconcilable results. This paper fills the void by being the first to employ the new financial development index introduced by Svirydzenka (2016, IMF) to explore the financial development -growth nexus. The new index is comprised of: i) financial institution and ii) financial market sub-indices; each derived from data on the depth, efficiency and access of each sub-component dimension. Applying, Kremer et al’s (2013) GMM (Generalized Method of Moments) threshold technique, to a dataset of 80 countries, statistical evidence is presented supporting the positive effect of financial development on growth. However, the oft-reported, non-linearity hypothesis is not robustly supported by the data. In this vein, the paper demonstrates that differences in threshold parameter estimates may arise by simply varying certain econometric assumptions. On the other hand, savings rates, human capital, foreign direct investment, inflation and trade openness are relatively more robust determinants of real growth; with the strength of the effects of these covariates dependent on a country’s distance from the frontier.

Back