Journal of Economics and Development Studies

Finance-Growth Nexus in Presence of Banking Crises: Evidence in High Income and MENA Countries
Houssem Rachdi

Abstract
The important role of financial development in the process of economic growth has been subject to numerous debates in the economics literature. Results of empirical studies for single-country and cross-nations are often inconclusive. One neglected area in this topic of research is the presence of crises because many countries have been devastated by financial and banking crises the two last decencies. The main contribution of this paper is the analysis of the correlation between financial development and economic growth in the presence of banking crises. We explore this relationship by using the GMM system approach. Our study examines twenty nine high income (OECD and non-OECD) and seven Middle East and North Africa (MENA) countries for the years 1980-2009. Our econometric results show a negative coefficient between banking crises and economic growth. This coefficient is not statistically significant for high income countries and significant for MENA countries. We also find a negative coefficient of different measures of financial development. This coefficient is not statistically significant for MENA countries and significant for high income countries. In periods of crises, the effectiveness of financial system is reduced leading to less growth.

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