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Revisiting the finance-growth nexus: A socioeconomic approach

Agiropoulos, Charalampos and Karkalakos, Sotiris and Polemis, Michael (2019): Revisiting the finance-growth nexus: A socioeconomic approach.

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Despite the fact that financial development is recognised as a vital determinant of countries’ economic growth path, many empirical studies fail to further isolate the role of socioeconomic indicators on accelerating growth. This study attempts to fill this gap by examining the statistical significance and the behavior of several socioeconomic indicators on economic growth. We apply parametric (System GMM estimators) and semi-parametric techniques along the lines of Baltagi and Li (2002) on a panel data set of 19 EU countries over the period 1995-2017. We test for nonlinear effects on economic growth for three banking indicators (domestic credit, non-performing loans and banking capitalization). In contrast to the related literature, our findings provide sufficient evidence of nonlinear relationships between several aspects of financial development and economic growth. Our results imply significant policy implications for policy makers and regulators in their effort of balancing banking development with a resurgence in economic growth within the EU periphery.

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