Uncertainty, financial development and economic growth: an empirical analysis

This paper examines whether financial sector development may partly undo growth-reducing effects of policy uncertainty. By performing a cross-country growth regression for the 1970-1995 period I find evidence that countries with a more developed financial sector are better able to nullify the negative effects of policy uncertainty on per capita economic growth. For countries with a very well developed financial sector, it may even be the case that an increase in policy uncertainty positively affects per capita economic growth. This clearly indicates the relevance of financial sector development.