relationship between the financial development, financial stability and
economic growth constitutes a field of academic research in recent years. For
this purpose, dynamic panel data techniques are applied for the investigation
of the impact of financial development and stability on economic growth. The
empirical analysis is based on a sample of 28 countries of the European Union
over the period 2004 – 2014. The results indicate that the development of
banking system has a negative impact on economic growth. Therefore, the allocation of private
credit is inefficient and does not improve the economic growth. Moreover, the
results for the impact of financial markets development are mixed.
Specifically, the size of the stock markets has a positive effect on economic
growth, whereas the market liquidity negatively influences the economic growth.
In addition, financial instability has a negative impact on economic growth.
The rates of non-performing loans have increased in affected by financial
crisis European Union countries and constitute a detrimental factor for
economic growth. Finally, factors such as investment and trade openness play a
significant role and promote the economic growth. However, inflation and
government expenditure have a negative relationship with economic growth.
JEL classification numbers: O10
Keywords: panel data, economic
growth, financial development, financial stability, GMM estimator.