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Thresholds in finance–growth nexus: Evidence from G‐7 economies
Author(s) -
Swamy Vighneswara,
Dharani Munusamy
Publication year - 2021
Publication title -
australian economic papers
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.351
H-Index - 15
eISSN - 1467-8454
pISSN - 0004-900X
DOI - 10.1111/1467-8454.12192
Subject(s) - nexus (standard) , economics , granger causality , gross domestic product , causality (physics) , finance , notice , macroeconomics , econometrics , computer science , embedded system , physics , quantum mechanics , political science , law
This study explores the finance and economic growth nexus in G‐7 economies as these countries experience significantly higher levels of financial development. Using a balanced panel of 31 years from 1983 to 2013, we provide new evidence on the finance–growth relationship. We show the presence of nonlinearity as there is an inverted U‐shaped relationship between finance and growth in the long run. Estimating the thresholds in the finance–growth nexus, we notice that there exists a threshold effect of finance at 109% of Gross Domestic Product (GDP). We observe that exceeding the threshold would hinder the countries instead of furthering economic growth as too much finance is harmful. Based on the panel Granger causality test results, we claim that financial development should be associated with optimal growth performance. Our findings for the G‐7 economies offer some useful policy inferences to the emerging and developing economies in designing their financial development strategies.