Which Way to Go Now? Financing Economic Growth in the Sustainable Development Era

Abstract

Our paper uses a novel methodology to reexamine the relationship between financial development and economic growth in the era of sustainable development. Our empirical procedure deals with both functional-form misspecification bias as well as bias from endogenous regressors. It also provides an estimate of the growth-finance relationship for every country-year observation, allowing us to examine the relationship of interest for various country groups, using a global sample of 133 countries during 1960–2015. Our results indicate that countries with weak institutions and a smaller-than-average banking sector will reap more benefits from bank-based financial systems. The impact of financial development on economic performance has enormous policy implications for international institutions that provide policy support to countries in their pursuit of achieving the 2030 Agenda for Sustainable Development.