Financial development, threshold effects and convergence in developing and emerging countries

In this paper, we perform GMM dynamic panel data estimations to test the relationship between financial development and growth. Our dataset is composed of 112 emerging and developing countries over the period 1975-2007. More specifically, we test the presence of financial development threshold effects, on the one hand, between financial development and long-term growth, and, on the other hand, between financial development and long-term GDP. We also ask whether such effects may explain the link financial development - convergence/divergence to the advanced countries' growth. As predicted by literature, the very low level of financial development seems to explain the inability of countries to converge to frontier growth rate. But the higher the level of financial development, the lower its positive effect on steady-state per-capita GDP. Finally, the presence of financial development threshold effect between financial development and steady-state growth rate is not confirmed. We support only partially the role that the financial development could play in the acceleration of the convergence of emerging and developing economies towards the world frontier growth.