1 Puzzles in financial development and economic growth

This paper aims to contribute to the empirical literature on the impact of financial development upon economic growth by testing the robustness of two puzzles documented in a number of recent papers (Atje and Jovanovic, 1993, Beck and Levine, 2004, Favara, 2003, Loayza and Rancière, 2006, Saci et al., 2009). One puzzling finding in the literature is related to the positive impact of private credit upon economic growth in the long-run, combined with a negative impact in the short-run. The second puzzle arises with the inclusion of stock market related variables for which there is a positive and significant impact irrespective of the time horizon. This paper uses, to the best of the authors ’ knowledge, the most updated (1970-2006) and comprehensive balanced cross sectional dataset for a number of bank and stock market related variables involving least developed (LDCs) and other countries. Finally, we compare the results for short run and long run estimation with and without inclusion of countries at low level of financial intermediaries and economic development