Financial Development and Economic Growth in European Countries: Bootstrap Causality Analysis

In the present study, it was investigated whether there was a causality relationship between financial development and economic growth for sixteen European countries. Data from the period of 1988-2012 was analyzed using the bootstrap panel causality test, which takes cross-section dependence and heterogeneity into account. The results of the test showed that there was a strong causality relationship between financial development and economic growth in European countries. In European countries, there was a causality relationship from economic growth to financial development and from financial development to economic growth. These results support both the supply-leading and the demand-following hypotheses. Therefore, it can be said that the feedback hypothesis is valid for European countries