Economic Change and Restructuring

, Volume 47, Issue 2, pp 89–115 | Cite as

On the finance-growth nexus: additional evidence from Central and Eastern Europe countries



We investigate the finance-growth nexus for a sample of thirteen transition economies over the period 1995–2007 using panel cointegration tests and a panel error-correction model. By combining results for models with alternative dependent variables and several measures of financial development, we find that the relationship between financial deepening and real growth is largely positive in the long-run, and it develops its full potential when funds are directed towards private enterprises. In the short-run, however, the growth effects of an expansion of financial markets are weaker and negative, supporting the idea that financial development has also a dark side, as it exacerbates fragility and destabilizes the economy through recurrent crises.


Financial development Economic growth Panel causality Transition countries 

JEL codes

C33 O16 O52 


  1. Ang J, Madsen J (2012) Risk capital, private credit and innovative production, Monash University, Department of Economics Discussion paper No.08/12Google Scholar
  2. Apergis N, Filippidis I, Economidau C (2007) Financial deepening and economic growth linkages: a panel data analysis. Review of World Economics 143:179–198CrossRefGoogle Scholar
  3. Arestis P, Demetriades O (1997) Financial development and economic growth: assessing the evidence. Economic Journal 107:783–799CrossRefGoogle Scholar
  4. Bangake C, Eggoh J (2011) Further evidence on finance-growth causality: a panel data analysis. Economic Systems 35:176–188CrossRefGoogle Scholar
  5. Beck T, Büyükkarabacak B, Rioja F, Valev N (2009) Who gets the credit? And does it matter? Household versus firm lending across countries, CentER Discussion Paper No.2009-41Google Scholar
  6. Beck T, Degryse H, Kneer C (2012) Is more finance better? Disentangling intermediation and size effect of financial systems, CentER Discussion Paper No.2012-060Google Scholar
  7. Bencivenga V, Smith B (1991) Financial intermediation and endogenous growth. Rev Econ Stud 58:195–209CrossRefGoogle Scholar
  8. Breitung J (2000) The local power of some unit root tests for panel data. Advances in Econometrics 15:161–178CrossRefGoogle Scholar
  9. Brown M, De Haas R (2012) Foreign banks and foreign currency lending in emerging Europe. Economic Policy 27:57–98CrossRefGoogle Scholar
  10. Canning, D, Pedroni P (1999) Infrastructure and long run economic growth, mimeo, Indiana UniversityGoogle Scholar
  11. Caporale G, Rault C, Sova R (2009) Financial development and economic growth: Evidence from ten new EU members. Deutsches Institut für Wirtschaftsforschung, Discussion Paper 940Google Scholar
  12. Casselli F, Esquivel G, Lefort F (1996) Reopening the convergence debate: a new look at cross-country growth empirics. J Econ Growth 1:363–389CrossRefGoogle Scholar
  13. Choi I (2001) Unit root tests for panel data. Journal of International Money and Finance 20:249–272CrossRefGoogle Scholar
  14. Claessens S, Can Horen N, Gurcanlar T, Mercado J (2008) Foreign bank presence in developing countries 1995–2006: data and trend, mimeoGoogle Scholar
  15. Chistopoulos DK, Tsionas EG (2004) Financial development and economic growth: evidence from a panel unit root and cointegration tests. J Dev Econ 73:55–74CrossRefGoogle Scholar
  16. Damijan J, Majcen B, Knell M, Rojec M (2003) The role of FDI, absorptive capacity and trade in transferring technology to transition countries: evidence from firm panel data for eight transition countries. Economic Systems 27:189–204CrossRefGoogle Scholar
  17. Dell’Ariccia G, Marquez R (2006) Lending booms and lending standards. Journal of Finance 61:2511–2546CrossRefGoogle Scholar
  18. Demetriades P, Hussein K (1996) Does financial development cause economic growth? Time series evidence from 16 countries. J Dev Econ 51:387–411CrossRefGoogle Scholar
  19. Demetriades P, Law S-H (2006) Finance, institutions and economic development. International Journal of Finance and Economics 11:245–260CrossRefGoogle Scholar
  20. Demirgüç-Kunt A, Levine R (2001) Financial Structure and Economic Growth. MIT Press, BostonGoogle Scholar
  21. Dufrénot G, Mignon V, Péguin-Feissole A (2010) Testing the finance-growth link: is there a difference between developed and developing countries. Economics Bulletin 30:1794–1807Google Scholar
  22. Enoch C, Ötker-Robe I (2007) Rapid credit growth in Central and Eastern Europe. Palgrave McMillan, LondonCrossRefGoogle Scholar
  23. Favara G (2003) An empirical reassessment of the relationship between finance and growth, IMF Working Paper No.03/123Google Scholar
  24. Fink G, Haiss P, Mantler HC (2005) The finance-growth-nexus: market economies versus transition countries, Europainstitut. Working Paper 64Google Scholar
  25. Fink G, Haiss P, Vuksic G (2009) Contribution of financial market segments at different stages of development: transition, cohesion and mature economies compared. Journal of Financial Stability 5:431–455CrossRefGoogle Scholar
  26. Furceri D, Zdzienicka A (2011) The real effect of financial crises in the European transition economics. Econ Transit 19:1–25CrossRefGoogle Scholar
  27. Gayton A, Ranciere R (2003) Banks, liquidity crises and economic growth. International Monetary FundGoogle Scholar
  28. Goldsmith R (1969) Financial Structure and Development. Yale University Press, YaleGoogle Scholar
  29. Greenwood J, Jovanovic B (1990) Financial development, growth, and the distribution of income. Journal of Political Economy 98:1076–1107CrossRefGoogle Scholar
  30. Greenwood J, Smith B (1997) Financial markets in development, and the development of financial markets. Journal of Economic Dynamics and Control 21:145–181CrossRefGoogle Scholar
  31. Guiso L, Jappelli T, Padula M, Pagano M (2004) Financial market integration and economic growth in the EU. Economic Policy 40:523–577CrossRefGoogle Scholar
  32. Hagmayr B, Haiss P, Sumegi K (2007) Financial sector development growth—Evidence for Southeastern Europe. EuropaInstitut, Working PaperGoogle Scholar
  33. Hanousek J, Kočenda E, Maurel M (2011) Direct and indirect effects of FDI in emerging European markets: survey and meta-analysis. Economic Systems 35:301–322CrossRefGoogle Scholar
  34. Haselman R, Wachtel P (2010) Institutions and bank behavior: legal environment, legal perception, and the composition of bank lending. Journal of Money, Credit and Banking 42:965–998CrossRefGoogle Scholar
  35. Hondroyiannis G, Lolos S, Papapetrou E (2005) Financial markets and economic growth in Greece, 1986–1999. Journal of International Financial Markets, Institutions and Money 15:173–188CrossRefGoogle Scholar
  36. Im KS, Pesaran M, Shin Y (2003) Testing for unit roots in heterogeneous panels. Journal of Econometrics 115:53–74CrossRefGoogle Scholar
  37. Jacobson T, Lindé J, Roszbach K (2005) Exploring interactions between real activity and the financial sector. Journal of Financial Stability 1:308–341CrossRefGoogle Scholar
  38. Kao C, Chang M (2000) On the estimation and inference of a cointegrated regression in panel data. In: Baltagi B (ed) Nonstationary Panels, Panel Cointegration and Dynamic Panels. Elsevier, New YorkGoogle Scholar
  39. Kaszuba S (2010) Central and Eastern Europe stock exchange markets in the era of globalization. International Journal of Trade, Economics and Finance 1:89–92CrossRefGoogle Scholar
  40. Kharas H, Pinto B, Ulatov S (2001) An analysis of Russia’s 1998 meltdown: fundamentals and market signals. Brookings Papers on Economic Activity 32:1–68CrossRefGoogle Scholar
  41. King R, Levine R (1993a) Finance, entrepreneurship, and growth: theory and evidence. Journal of Monetary Economics 32:513–542CrossRefGoogle Scholar
  42. King R, Levine R (1993b) Finance and growth: schumpeter might be right. Quart J Econ 108:717–738CrossRefGoogle Scholar
  43. Konings J (2001) The effects of foreign direct investment on domestic firms: evidence from firm level panel data in emerging economies. Econ Transit 9:619–633CrossRefGoogle Scholar
  44. Levin A, Lin CF, Chu C (2002) Unit root tests in panel data: asymptotic and finite-sample properties. Journal of Econometrics 108:1–24CrossRefGoogle Scholar
  45. Levine R (1997) Financial development and economic growth: views and agenda. Journal of Economic Literature 35:688–726Google Scholar
  46. Levine R (2005) Finance and growth: theory and evidence. In: Aghion P, Durlauf S (eds) Handbook of Economic Growth, vol 1. North Holland, AmsterdamGoogle Scholar
  47. Levine R, Zervos S (1998) Stock markets, banks, and economic growth. American Economic Review 88:537–558Google Scholar
  48. Levine R, Loayza N, Beck T (2000) Financial intermediation and growth: causality and causes. Journal of Monetary Economics 46:31–71CrossRefGoogle Scholar
  49. Loayza N, Ranciere R (2006) Financial development, financial fragility, and growth. Journal of Money, Credit and Banking 38:1051–1076CrossRefGoogle Scholar
  50. Lucas R (1988) On the mechanics of financial development. Journal of Monetary Economics 22:3–45CrossRefGoogle Scholar
  51. Luintel K, Khan M (1999) A quantitative re-assessment of the finance-growth nexus: evidence from a multivariate VAR. J Dev Econ 60:381–405CrossRefGoogle Scholar
  52. Maddala G, Wu S (1999) A comparative study of unit root tests with panel data and a new simple test. Oxford Bull Econ Stat 61:631–652CrossRefGoogle Scholar
  53. Mehl A, Vespro C, Winkler A (2006) Financial sector development in South-astern Europe: quality matters. In: Liebcher K, Christl J, Mooslechner P, Ritzberger-Grünwald D (eds) Financial development, growth and stability. Edward Elgar, CheltenhamGoogle Scholar
  54. Panagiotis L, Dapontas D (2008) Currency crises in transition economies: some further evidence. Journal of Economic Issues 42:1083–1099Google Scholar
  55. Patrick H (1966) Financial development and economic growth in underdeveloped countries. Econ Dev Cult Change 14:174–189CrossRefGoogle Scholar
  56. Pedroni P (1999) Critical values for cointegration tests in heterogeneous panels with multiple regressors. Oxford Bull Econ Stat 61:653–670CrossRefGoogle Scholar
  57. Pedroni P (2000) Fully modified OLS for heterogeneous cointegrated panels. Advances in Econometrics 15:93–130CrossRefGoogle Scholar
  58. Pedroni P (2004) Panel cointegration, asymptotic and finite sample properties of pooled time series tests with an application to the PPP hypothesis. Econometric Theory 20:597–625CrossRefGoogle Scholar
  59. Puri M and Zarutskie R (2012) On the lifecycle dynamics of Venture-Capital- and Non-Venture-Capital financed firms, Journal of FinanceGoogle Scholar
  60. Quah D (1993) Empirical cross-section dynamics in economic growth. European Economic Review 37:426–434CrossRefGoogle Scholar
  61. Rioja F, Valev N (2004) Does one size fit all? A reexamination of the finance and growth relationship, Journal of Development Economics 74:429–447Google Scholar
  62. Robinson J (1952) The Rate of Interests and Other Essays. Macmillan, LondonGoogle Scholar
  63. Rousseau P, Wachtel P (1998) Financial intermediation and economic performance: historical evidence from five industrialized countries. Journal of Money, Credit and Banking 30:657–678CrossRefGoogle Scholar
  64. Rousseau P, Wachtel P (2011) What is happening to the impact of financial deepening on economic growth? Econ Inq 49:276–288CrossRefGoogle Scholar
  65. Shan J, Morris A (2002) Does financial development “lead” economic growth? International Review of Applied Economics 16:153–168CrossRefGoogle Scholar
  66. Schumpeter J (1961) The Theory of Economic Development. Oxford University Press, OxfordGoogle Scholar
  67. Shan J (2005) Does financial development “lead” economic growth? A vector-autoregression appraisal. Appl Econ 37:1353–1367CrossRefGoogle Scholar
  68. Shaw E (1973) Financial Deepening in Economic Development. Oxford University Press, OxfordGoogle Scholar
  69. Vogel U and Winkler A (2011) Cross-border bank flows and foreign banks in the global financial crises—is Eastern Europe different? mimeoGoogle Scholar
  70. Winkler A (2009) Southeastern Europe: financial deepening, foreign banks and sudden stops in capital flows. Focus on European Economic Integration Q1(09):84–97Google Scholar
  71. Wu J-L, Hou H, Cheng S-Y (2010) The dynamic impacts of financial institutions on economic growth: evidence from the European Union. J Macroecon 32:879–891CrossRefGoogle Scholar
  72. Zdzienicka A (2010) A re-assessment of credit development in European transition economies, MPRA Working paper No.22692Google Scholar

Copyright information

© Springer Science+Business Media New York 2013

Authors and Affiliations

  1. 1.Department of Economics and ManagementUniversity of TrentoTrentoItaly
  2. 2.Centro Europa RicercheRomeItaly

Personalised recommendations