Banking sector development and economic growth developing countries: A bootstrap panel Granger causality analysis

The purpose of this paper is to revisit the Granger causal relationship between banking sector development and economic growth for forty developing countries in the period 1970-2012. In order to capture the different aspects of banking sector development, we develop two banking sector development indices and apply the panel bootstrapped approach to Granger causality testing approach properly taking into account cross-sectional dependence and heterogeneity issues. The empirical results show limited support for the supply-leading, demand-following and complementarity hypotheses. Our results also provide evidence as the causal relationship between banking sector development and economic growth exists in twenty five countries