The impact of financial development on economic growth: Empirical analysis of emerging market countries

Purpose – The purpose of this paper is to provide a theoretical framework that integrates the endogenous growth and functions of financial markets and institutions theory in order to investigate how the financial market and the banking sector develop indicators that affect economic growth in these countries.

Design/methodology/approach – This paper is an empirical analysis of the relationship between financial development and economic growth for 42 emerging markets, over 12 years, using endogenous growth model.

Findings – First, the results suggest that stock market development has a significant effect on economic growth, and this effect remains strong even after the influence of banking sector and other control variables using a growth model. Second, the research findings largely support the view that there is a stable, long-term equilibrium relationship between the evolution of the stock market and the evolution of the economy.

Originality/value – The evidence supports the view that the relation between stock market development and economic growth in emerging economies is bi-directional. The findings describe that the stock market and the banking sector in emerging economy are complementary rather than substitutes in providing financial services to the economy.