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Thresholds of financial development in the Euro area
Author(s) -
Swamy Vighneswara,
Dharani Munusamy
Publication year - 2020
Publication title -
the world economy
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.594
H-Index - 68
eISSN - 1467-9701
pISSN - 0378-5920
DOI - 10.1111/twec.12902
Subject(s) - economics , nexus (standard) , granger causality , notice , panel data , stock (firearms) , stock market , monetary economics , real gross domestic product , macroeconomics , finance , econometrics , mechanical engineering , paleontology , horse , computer science , political science , law , biology , embedded system , engineering
We analyse the dynamics of financial development and economic growth in the Euro area as these countries went through considerably higher levels of financial development. Using a balanced panel data of 38 years from 1980 to 2018, we offer new evidence on the finance–growth nexus. We show the presence of non‐linearity 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 a threshold effect at 74%–86% of GDP for domestic credit; 51% of GDP for stock turnover ratio; and 65% of GDP for stock market capitalisation. We notice that exceeding the threshold causes deceleration in economic growth as too much finance results in crowding out effect for productive economic activities. The panel Granger causality test results show that financial development should be associated with optimal growth performance. These findings in the Euro area provide some useful policy implications to the emerging and developing economies in designing their financial development strategies.