Demand following or supply leading? A panel data analysis for developed, developing, and less developed countries

In this paper, the linkages between financial development and economic growth in developed, developing and less developed countries are investigated using unbalanced panel cointegration and causality analysis in the period of 1980 – 2011. The results of the Pedroni cointegration analysis show the existence of cointegration relations between financial development and economic growth for whole country groups, but Kao cointegration analysis indicates the long – run relationship between the related variables for the group of less developed countries. The results of Granger causality analysis show that there is bidirectional causality relationship between financial development and economic growth for developed and developing countries. However, for less developed countries only unidirectional causal nexus is obtained running from real economic growth to financial development. This means that demand following process is valid for less developed country group.Publisher's Versio