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Financial Development And Income In Developing Countries

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Executive Summary

This paper presents an empirical analysis of the controversial relationship between financial system development and economic development. Using cointegration and VAR estimations on annual data from Africa, the authors examine the nature of the relationship between financial development and income. They find mixed results on both the short and the long-run relationships between the two variables. They find finance causing income, income causing finance, and bi-directional causality. The results indicate that neither the short-run effects nor the long-run relationship seem to linearly depend on the level of financial development or the stage of development.

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