Causality between financial development and economic growth: a case study on selected middle eastern countries

Abstract

This study empirically investigates the hypothesis of causality between financial development and economic growth in seven Middle East and North African countries from a time series perspective. I use ordinary least squares and vector auto regression estimations to infer Granger Causality, after controlling for a set of nonfinancial variables. Results show evidence of unidirectional and bidirectional causality between financial development and economic growth in four cases, no causality in two cases, and no significant relation between financial development and economic growth in one case. The significance of the relations varies on case-specific basis. I also control for three indices of civil liberties, economic and political freedom, and find significant evidence of an impact on GDP in three out of seven countries.