Road to Prosperity: Investigating the Impact of Financial Development on Economic Growth

This study highlights the crucial role of financial development in driving economic growth across different income groups, emphasizing the need for targeted policy approaches to maximize its impact. For this purpose, the finance-growth relationship in 65 countries of five income groups, from 2001 to 2020 are investigated. Utilizing panel models, including unit root tests, panel cointegration, and robustness checks via FMOLS and CCE methods, findings from 65 countries from five different income groups from indicate that financial development significantly boosts income in high-income countries, despite some inconsistencies. In these income groups, factors like investment expenditure, labor, and trade positively influence GDP per capita, while government expenditure and CPI negatively impact it. For lower- and upper-middle-income countries, financial structure also enhances GDP, albeit with the varying significance of trade openness and CPI. However, financial development does not significantly affect income in low-income countries, suggesting a prerequisite development level for finance to stimulate growth. The findings demonstrate that the general development of financial structure substantially impacts economic growth. In light of these findings, developing comprehensive but separate policy implications that address all five income groups is imperative.