Abstract
This paper takes a fresh look at the impact of financial development on economic growth by using recently developed kernel methods that allow for heterogeneity in partial effects, nonlinearities and endogenous regressors. Our results suggest that while the positive impact of financial development on growth has increased over time, it is also highly nonlinear with more developed nations benefiting while low-income countries do not benefit at all. We also conduct a novel policy analysis that confirms these statistical findings. In sum, this set of results contributes to the ongoing policy debate as to whether low-income nations should scale up financial reforms.
•The (positive) impact of financial development on growth has increased over time.•Low income countries do not benefit (in terms of growth rates) from financial development.•The growth process is highly nonlinear.•Our policy analysis supports our statistical results.•Our econometric results provide a robust perspective on the relationship between financial development and growth.
