The Finance-Growth Nexus: Is There a Difference between Market Economies and Transition Countries?

Abstract

Applying a growth accounting framework and a wide range of static and dynamic panel data estimators on a panel covering 22 market economies and 11 transition countries over 1990-2001, we find a weak and fragile finance-growth link in market economies, but strong financial sector-induced short-run growth effects in transition countries. The main growth effect hereby runs via the productivity channel. Parametric heterogeneity and financial structure seem to play a more important role than hitherto assumed: The financial sector and its different segments trigger different growth effects in different countries.

Keywords: Financial sector, economic growth, transition economies, market economies

JEL Classification: G10, G21, O11, O16