Did Capital Market Development and Financial Depth Contribute to Growth? Evidence from European Financial Integration

This study investigates the impact of financial depth and capital market development on the growth of European nations. Financial depth is important if the benefits of financial integration are to be realized. In fact, financial depth is a channel that promotes growth and risk sharing and curbs macroeconomic volatility. Panel data of 17 European nations from 1970 to 2013 were taken and results were obtained through the Pool Mean Group Estimation technique. Our results show that, for European nations, financial depth and stock market development contributed to long-term growth. However, the contribution of financial depth outweighs that of stock market development. Moreover, it was observed that in the case of Hungary and Ireland, capital market development and financial depth contributed to short-term growth. Trade openness was found to be significant for growth in the cases of Austria and Finland while financial depth and trade openness were found to be significant for Germany and Switzerland. In conclusion, in the short-run, financial depth contributed more to growth than stock market development. Therefore, the role of financial depth in enhancing growth can be said to be more persistent than that of stock market development.