Private Investment and Financial Development in a Globalized World

Using recently developed panel data techniques on data for 43 developing countries over the period 1970-98, this paper provides an exhaustive analysis of casuality between aggregate private investment and financial development. GMM estimation on averaged data, and a common factor approach on annual data allowing for cross country error dependence and heterogeneity across countries, suggest positive causal effects going in both directions. The findings have rich implications for the development of financial markets and the conduct of macroeconomic policies in developing countries in an integrated global economy