Finance and Macroeconomic Performance. Some Evidence for Emerging Markets

This paper examines whether financial-sector development in several emerging markets affects their real economic activity. Results from cointegration and error correction models suggest that financial deepening (alternatively measured) exerts a robust longterm stimulating effect on real economic activity (both overall and sectoral) in all countries examined. However, short-term effects of financial deepening prove generally nonexistent, or tenuous at best. The results suggest that improving the structure and operation of the financial sector in emerging markets does stimulate real growth, but only if such improvement persists over a prolonged period of time.