Financial development, economic growth, and threshold effects

Abstract

In this thesis, the relationship between financial development and economic growth is analyzed empirically using a Vector Auto Regressive model (VAR) and a Generalized Method of Moments (GMM) on dynamic panel data. This work is based on West African Economic and Monetary Union (WAEMU) countries over the period 1980-2014. The study analyzes the causality of the relationship between the development of the financial sector and economic development of each country and tests the convergence and threshold effects within the region. The first finding of this thesis is that the causality patterns vary across countries and depend on the financial indicator used. Secondly, the very low development level of the financial industry in some countries explains their difficulty to converge toward the world leading economy or world technology frontier (USA). When the level of financial development increases, its impact on long-term GDP vanishes and can be harmful. Finally, it is proved that finance is critical in the convergence process of countries in the WAEMU region.