This paper aims to investigate the long-run relationship between financial development and economic growth using panel unit root and panel cointegration analysis in 16 selected low-income countries for the period of 20 years from 1995 to 2014. The long-run relationship has been estimated using fully modified and dynamic OLS techniques. The results show that there exists a cross-sectional dependence across the countries. The Pedroni's panel cointegration analysis provides clear support for the hypothesis that there exists a long-run cointegrating relationship between financial development and economic growth. The long-run panel estimates indicate that financial development has a positive and significant impact on economic growth. For the robustness of the results, this paper has also performed time-series analysis on a single country basis. The results also show the positive impact of financial development on economic growth in the majority of the countries. Likewise, it is found that flow of credit to the private sector is very low in this region of the world. Thus, one of the important policy implications of this study finding is that policy-makers should give more emphasis on the policies that provide a favourable environment for private sector to grow.
financial development economic growth cross-sectional dependence panel unit root panel cointegration low-income countries