Financial Intermediation and Economic Growth

Abstract

The paper evaluates the relationship between financial intermediation and the economic growth in the developing economic systems. First, using dataset from 28 countries,between 2001 and 2010 we define a financial intermediation indicator applying EFA method. We use several dimensions of the financial intermediation: Domestic credit provided by banking sector (% of GDP); Domestic credit to private sector (% of GDP); Broad money (% of GDP); Market capitalization of listed companies (% of GDP). As a preliminary step, using Spearman rank-order co-variance analysis we test the correlation between variables and the result confirms in general a high correlation degree between the indicators. Secondly, we compare this financial intermediation indicator with some dimension of economic growth using three different methods, OLS (Ordinary Less Square), GLM (Generalized Linear Model) and QR (Quantile Regression), in order to check the robustness of the model. The result suggests that the financial intermediation as part of financial development is positively associated with economic growth.