Does financial development imply economic growth?

A financial sector is needed for a country to allocate resources and store capital. The ways this sector can be organized vary greatly among countries in the world. In this thesis I will try to investigate if a country’s financial system is beneficial for its economic growth. For testing this a static linear panel data model is used, and several regressions with different proxy variables are performed. My sample consists of 21 Asian countries and the proxy variables are measuring either stock market development, banking sector development or economic growth. The purpose of having numerous variables is that it allows for a more precise analysis of which part of the financial system that potentially generates economic growth. The results differ among the proxy variables, where for example the stock market variable Turnover ratio is significant while the others are not. The same situation arises for the banking sector variables. A few of them cannot be proven to be significant, while the main proxy variable, Domestic credit to private sector by banks, did enter the regression significantly. These results indicate that there do exist some sort of connection between financial development and economic growth, but that attention has to be paid to where in the financial system this relation comes from