Does financial development have a nonlinear effect on economic growth? A multidimensional approach

This study contributes to the literature by being the first to integrate the multidimensional IMF index and all subcomponents – which collectively encompass efficiency, access, and depth across financial markets and institutions – employing panel fixed effects and GMM-SYS models to assess whether financial development affects economic growth nonlinearly. We move beyond conventional measures and offer a broader perspective on the multidimensional aspects of financial development. Drawing on a dataset covering 131 countries over 1980–2019, our analysis reveals that financial market development promotes growth until a threshold, above which it hinders growth. Similarly, while the depth of financial markets initially has a positive effect on growth, this effect becomes negative once it surpasses a threshold. The thresholds at which these growth-enhancing effects reverse are also identified in this study, guiding policy in countries with varying income levels.