Does financial development cause economic growth? Time-series evidence from 16 countries

This paper conducts causality tests between financial development and real GDP using recently developed time series techniques. Our results provide little support to the view that finance is a leading sector in the process of economic development. We find, however, considerable evidence of bi-directionality and some evidence of reverse causation. Our findings also clearly demonstrate that causality patterns vary across countries and, therefore, highlight the dangers of statistical inference based on cross-section country studies which implicitly treat different economies as homogeneous entities.