The Relationship between Financial Development and Economic Growth in European Countries

Abstract:

This study examines the relationship between banking sector development, stock market development and economic growth. Using annual data, for the period 1990-2015, in twelve European Countries. The principal component analysis (PCA) was used possible to construct two new measures (banking sector development and stock market development). The panel Vector Auto-Regressive (PVAR) model and Granger causalities test was used. Results show the model is exogenous; the shocks caused by the introduction of the euro and the subprime crisis are significant; and the banking sector development in the presence of stock market development are significant.