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Non-Linear Finance–Growth Nexus: A Threshold with Instrumental Variable Approach

This paper revisits the question of whether the finance-growth nexus varies with the stages of economic development. Using a novel threshold regression with the instrumental variables approach proposed by Caner and Hansen (2004) to the dataset used in Levine "et al." (2000) we detect overwhelming evidence in support of a positive linkage between financial development and economic growth, and this positive effect is larger in the low-income countries than in the high-income ones. The data also reveal that financial development tends to have stronger impacts on capital accumulation and productivity growth in the low-income countries than in the high-income ones. The findings are robust to alternative financial development measures and conditioning information sets. Copyright (c) 2009 The Authors. Journal compilation (c) 2009 The European Bank for Reconstruction and Development.