Financial Deepening and Economic Growth in Some ERF Countries: An Empirical Inquiry

Abstract This study investigates empirically the role of financial deepening in the economic growth process in three ERF countries (Saudi Arabia, Turkey, and the UAE). Unlike most previous research, focus here is on the causal link between the two variables in order to discriminate between several alternative theoretical hypotheses. To that end, the cointegrated and error-correction modeling strategy is used. The results suggest that the causal role of financial deepening in economic growth across the three countries hinges crucially on the precise measure used to quantify financial deepening. While a given measure provides support for a short-run causal influence, another may only indicate the presence of a long-run causal linkage. Overall, though, the empirical results do support the view that financial deepening, however defined, is an engine of economic growth in the three countries examined. Perhaps equally important, the results also suggest that financial deepening requires a fairly long time (measured in years) before its favorable effects become noticeable on real economic growth. Consequently, to be effective, policies to promote financial deepening in these countries may also need to be persistent.