Financial Development and Economic Growth Nexus: Evidence From Emerging Economies

Abstract

This study examines the relationship between financial development and economic growth in developing countries, using indicators such as stock market capitalization and domestic credit to the private sector to capture financial-sector depth and functioning. We use panel data for several emerging economies (2020–2023) drawn from the World Bank’s World Development Indicators and the Global Financial Development Database. Econometric techniques include panel unit-root tests, Pedroni panel cointegration, and a dynamic Generalized Method of Moments (GMM) model to address endogeneity, heterogeneity, and long run dynamics.  Empirical results indicate that financial development significantly promotes growth. Domestic private credit (β = 0.184; p < 0.01) and stock market capitalization (β = 0.129; p < 0.05) positively affect GDP growth. Trade openness also supports growth (β = 0.091; p < 0.10), while inflation hinders it (β = −0.073; p < 0.05). Pedroni cointegration and panel unit root tests confirm a stable long run relationship (ADF = −2.96; p < 0.01). Financial development—through expanded private credit and deeper capital markets—supports sustainable growth in developing countries, while high inflation undermines it. Results reinforce existing literature on the long run finance–growth nexus and suggest policies that deepen financial intermediation and maintain macroeconomic stability.