On the finance-growth nexus: additional evidence from Central and Eastern Europe countries

We investigate the finance-growth nexus for a sample of thirteen transition economies over the period 1995-2007 using panel cointegration tests and a panel error-correction model. By combining results for models with alternative dependent variables and several measures of financial development, we find that the relationship between financial deepening and real growth is largely positive in the long-run, and it develops its full potential when funds are directed towards private enterprises. In the short-run, however, the growth effects of an expansion of financial markets are weaker and negative, supporting the idea that financial development has also a dark side, as it exacerbates fragility and destabilizes the economy through recurrent crises.