An inverted U-shape relationship between economic growth and financial development: a study from FY20 countries

This study investigates the relationship between financial development and economic growth. Using the sample data of 85 countries, including 53 developed and 32 developing countries, we find results consistent with previous findings that financial development positively impacts economic growth up to a certain threshold. However, when we extend the analysis into developed-developing countries and four different income-level countries, we find that the thresholds tend to be lower for developing and low-income countries. Further investigations show that institutional quality affects the impact. The threshold is lower in countries with low institutional quality. We interpret that the countries with low institutional quality have less capability to contain the negative effect of the financial market, lowering the threshold. Thus, controlling the negative impact of the financial market is an important aspect of the relationship between financial development and economic growth.