Econometric Analysis of Relationship between Financial Sector Indicators and Economic Development

This paper re-examines relationship between financial development and economic growth in a more detailed way. A lot of modern literature in this field is focused on the relationship between financial depth and economic growth. However, in this work, stand-alone effect of other dimensions (efficiency and access) is taken into account as well. At the same time, new proxy, EBANK for financial sector development is suggested. This variable stands for Internet Banking Usage (% of population). Using sample of 30 countries over 2007-2014, hypothesis of linear and non-linear relationships between each dimension of financial sector development and economic growth were tested. There was found linear relationship between financial sector size, measured by total credit to private sector as % of GDP, and economic growth, as well as between access to the financial sector, measured by number of Bank branches, and economic growth. At the same time, non-linear relationship between financial sector size, measured by stock market capitalization and economic growth was documented. Hence, if stock market capitalization reaches 179% of GDP, it would bring negative effect on the economic growth. However, this result was not confirmed by the data collected. On the other hand, opposite non-linear relationship was found between Internet Banking usage and economic growth. In particular, there is negative effect of Internet Banking usage on economic growth until the share of user do not cross threshold of 22% of all population. This result is supported by the analyzed dataset. All results are robust and do not caused by simultaneous causality, omitted variable bias or heterogeneity.