FINANCE AND GROWTH: IS SCHUMPETER RIGHT'?

Abstract

This paper examines the question of causality between financial development and economic growth. We demonstrate that results obtained from recent cross-section country studies, of the type popularised by Barro, suffer from serious shortcomings. We argue that country specific Institutional factors are likely to influence the causal nature of the relationship between financial development and economic growth, which is, therefore, expected to vary across countries. We suggest, instead, that a country by country study of the problem in hand is by far more promising.