Bangladesh Bank Training Academy Journal

Abstract

Over the last few decades researchers have reached in a consensus that fi nancial development, in its form of bank credit relative to GDP, has a strong positive relationship with economic growth. However, fi nancial innovations in the globalized economy have changed the situation gradually and made the relationship inconclusive. In this paper, we re-examine the relationship between fi nancial development and economic growth over 23 emerging economies and estimate that in some points ‘excessive fi nance’ can be happened. Our cross-country panel regression using GMM model suggests that fi nancial development no longer has a positive effect on economic growth when the credit to the private sector reaches about 165 percent of GDP. When we consider for non-linearity, we fi nd an inverted U-shaped relationship between fi nance and growth. Moreover, we also introduce the credit-to-GDP gap (i.e. deviation of credit gap from its long term trend) as one of the control variables and fi nd that th credit-to-GDP gap beyond 2 percent of GDP has a signifi cant negative relationship with real economic growth. Finally, we suggest macroprudential policies are to be designed to limit the procyclicality in the economy without affecting the real growth.