Does Financial Development Foster Economic Growth: Empirical Evidence from 27 EU Countries

The following empirical paper targets to analyze the causal relationship of the financial system and economic growth using panel data cointegration, Granger causality test, and fixed effect regression model approach. The empirical research based on the sample of 27 EU countries during 1990-2017, reveals the following results: a panel cointegration analysis confirms a long-term relationship between the financial system and economic growth for EU countries. Different results in terms of significance level for different channels of the financial system were observed but in general the financial system exhibited positive results. The Fixed effect model displays that financial development and real GDP per capita are positively and strongly linked. Granger causality shows that causality between the financial system and economic growth is bidirectional for EU countries that means economic growth also stimulates financial development. That is financial development stimulates growth, then/or economic growth reciprocally stimulates financial development. Generally, results are consistent with the previous works except for some few aspects.