Financial Development and Economic Growth: The Case of Greek Economy

Abstract

This paper examines the relationship among financial development and economic growth, within a framework which also accounts trade openness, for the case of Greece using data covering the period 2001-2017. We investigate this relationship using the Johansen and Juselius (1990) cointegration approach and the Vector Error Correction Models (VECM), employing Granger causality technique, in order to explore the presence of causality among the variables. The results of cointegration analysis suggested that there is one cointegrated vector among the functions of financial development, economic growth and trade openness. Granger causality tests have shown that there are unidirectional causalities running from economic growth to financial development as well as from financial development to trade openness. The results support that financial development and trade openness do not have causal impact on economic growth in Greece, for the aforementioned period. On the other hand, economic growth has a causal impact on trade both directly and indirectly through financial development.