The Relationship between Financial Development and Economic Growth in EU Member Countries: Sub-group estimation based on the Countries’ Level of development

Pușcașu, Ela-Andrada

doi:.0.0.0

Ela-Andrada Pușcașu

Bucharest University of Economic Studies, Bucuresti, Romania

Corresponding Author: Ela-Andrada Pușcașu ,Email: puscasuela15@stud.ase.ro

ABSTRACT

The financial systems undergo changes as countries grow, self-financed capital investments being less frequent and being replaced by financing through banking intermediation and later through capital markets. The financial development has an increasing role in the context of globalisation and emergence of market economies, supporting the exchange of funds between participants. Previous research papers present different results regarding the impact of financial development on economic growth; however, their preponderance shows a positive relationship, the financial system stimulating economic growth. This paper investigates the impact of financial development on economic growth using panel regressions for the member countries of the European Union, for the period 1990-2021. The results show that financial development, both through the activity of the banking sector and through the capital market, has a positive impact on economic growth, as long as there is a correspondence between the funds invested and the output of the real sector.

JEL Classification

D53: Financial Markets
E44: Financial Markets and the Macroeconomy
G21: Banks; Depository Institutions; Micro Finance Institutions; Mortgages
O40: General

Keywords: financial systems | economic growth | European Union | banking sector | capital market