Revisiting the finance-growth nexus: A socioeconomic approach

Although financial development is recognized as a vital determinant of countries' economic growth path, many empirical studies fail to further isolate the role of socioeconomic indicators on accelerating growth. This study attempts to fill this gap by examining the statistical significance and the behaviour of several socioeconomic indicators on economic growth. We apply parametric (System GMM estimators) and semi-parametric techniques along the lines of Baltagi and Li. Annals of Economics and Finance, 2002,3, 103-116 on a panel data set of 19 Eurozone countries over the period 1995-2017. We test for non-linear effects on economic growth for three banking indicators (domestic credit, non-performing loans, and banking capitalization). In contrast to the related literature, our findings provide sufficient evidence of non-linear relationships between several aspects of financial development and economic growth. Our results survive robustness checks implying significant policy implications for policymakers and regulators in their effort of balancing banking development with a resurgence in economic growth within the EU periphery.