European Business Schools Librarian's Group

Department of Economics Working Papers,
Vienna University of Economics and Business, Department of Economics

Nonlinearities and Parameter Instability in the Finance-Growth Nexus

Catherine Prettner ()
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Catherine Prettner: Department of Economics, Vienna University of Economics and Business

Abstract: This paper offers a re-assessment of the finance-growth nexus in a framework that allows to distinguish between short-run versus long-run effects. Our dataset contains information on 45 developed and developing countries over the period 1995-2011. We make use of the integration and cointegration properties of the data, establish a cointegrating relation and derive the long-run elasticities of per capita GDP with respect to employment, the physical capital stock, and financial development. We employ these results to specify an error correction model and assess whether the years of crisis have changed the relationship between finance and growth.

Keywords: Finance-Growth Nexus, Panel Cointegration, Error Correction Model, Threshold Model, End-of-sample instability

JEL-codes: E44; F43; F65 May 2016

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