Title: An inverted U-shape relationship between economic growth and financial development: a study from FY20 countries

Authors: Pratiwi Dwi Suhartanti; Bambang Iman Santoso; Mamduh M. Hanafi

Addresses: Department of Management, Faculty of Economics and Business, Universitas Gadjah Mada, Jalan Humaniora 1, Bulaksumur, Yogyakarta, Indonesia; STIE Indonesia Banjarmasin, Indonesia ' Department of Management, Faculty of Economics and Business, Universitas Gadjah Mada, Jalan Humaniora 1, Bulaksumur, Yogyakarta, Indonesia; Faculty of Economics and Business, Universitas Surapati, Jakarta, Indonesia ' Department of Management, Faculty of Economics and Business, Universitas Gadjah Mada, Jalan Humaniora 1, Bulaksumur, Yogyakarta, Indonesia

Abstract: This study investigates the relationship between financial development and economic growth. Using the sample data of 85 countries, including 53 developed and 32 developing countries, we find results consistent with previous findings that financial development positively impacts economic growth up to a certain threshold. However, when we extend the analysis into developed-developing countries and four different income-level countries, we find that the thresholds tend to be lower for developing and low-income countries. Further investigations show that institutional quality affects the impact. The threshold is lower in countries with low institutional quality. We interpret that the countries with low institutional quality have less capability to contain the negative effect of the financial market, lowering the threshold. Thus, controlling the negative impact of the financial market is an important aspect of the relationship between financial development and economic growth.

Keywords: economic growth; financial growth; threshold analysis; institutional quality; developing countries.

DOI: 10.1504/IJSE.2025.147206

International Journal of Sustainable Economy, 2025 Vol.17 No.3, pp.314 - 344

Received: 15 Sep 2023
Accepted: 29 Feb 2024
Published online: 11 Jul 2025 *

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