Does one size fit all?: a reexamination of the finance and growth relationship

Recent research has found a strong positive effect of a country's financial development on economic growth. We propose that this relationship may vary according to the level of financial development (divided in three regions). In the low region (countries with very low levels of financial development), additional improvements in financial markets have an uncertain effect on growth. In the intermediate region, financial development has a large, positive effect on growth. Finally, in the high region, the effect is positive, but smaller. We examine a panel of 74 countries using generalized method of moments (GMM) dynamic panel techniques and find support for the different regions. (C) 2004 Elsevier B.V. All rights reserved.