Three essays on the non-linear dynamics of the finance-growth nexus

This thesis provides three empirical essays on the non-linear dynamics of the finance-growth nexus using most recent econometric techniques. The first essay examines the relationship between financial structure and economic development for Germany, the USA, France and Turkey between 1989 and 2012. Nonlinear Autoregressive Distributed Lags (NARDL) is employed to investigate whether a dynamic change exists in the financial structure of these countries in response to a change in their stage of economic development suggested by the view of ‘new structuralism’. Unlike previous literature, which classified the financial systems of Germany as bank-based, the USA as market-based and France and Turkey as in an intermediate position between these two forms, the findings of the first essay presented in this work supports ‘new structuralism’. The second essay investigates the role of institutional quality on the relationship between finance and growth for 26 transition countries during 1996-2013 using the Dynamic Panel Threshold Model. The results have been reported for the entire sample and the sub-samples, Central Eastern European (CEE) and (CIS). The findings demonstrate that finance has greater effects on growth when associated with a sound institutional framework with more clear-cut results obtained in (CIS). The third essay provides new evidence on the relationship between state-ownership of banks and economic growth employing the method used in the second essay to capture differing effects of state-ownership in the banking system on growth with respect to a change in the quality of political, financial and legal institutions. The data evaluated concerned three different stages of economic development for 126 countries over the period 1999-2010. In contrast with the existing evidence which assumes homogeneity in the growth effects of the state-ownership of banks across different countries, the results of this study demonstrate this effect is rather heterogonous and depends strongly on the varying country characteristics