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Productivity Growth and Financial Development : Evidence from OECD Countries *

It has been long been debated in the economic development literature whether financial intermediation drives growth, as suggested by Schumpeter (1911), or whether it just responds to the demands of manufacturing in the process of industrialization, as suggested by Robinson (1956). Recent theoretical models propose that financial development is essential for growth. In contrast to other studies, we investigate this hypothesis from a time series perspective. We find that financial sector GDP is cointegrated for many OECD countries not so much with manufacturing output but mostly with manufacturing total factor productivity. Moreover, this relation is in some instances causal in the sense of Granger, especially in the long-run. However, even within this relatively homogeneous group of countries, the variety of results suggests a more complex picture than is apparent from cross-sectional evidence.