Linking the missing market: The effect of bond markets on economic growth

Past studies have largely focused on the positive role of banks and stock markets on economic growth. This paper adds bond markets as a third key component of the financial system. Using a panel data set of 38 countries, and applying the generalized method of moments techniques for dynamic panels, we find that (i) stock market development is positively related to economic growth; (ii) the contributing role of bank credit to economic growth diminishes as domestic bond markets develop; (iii) government bonds are positively related to economic growth, while the effects of corporate bonds change from negative to positive, as domestic financial structures expand in size and diversity.