Abstract:
Recent empirical OECD studies provide new empirical evidence confirming that financial development is closely linked to economic growth in OECD countries. Using new dynamic panel regression techniques, these appraisals indicate that within the group of high income countries stock market size as a measure of financial advancement contributes significantly to overall economic activity. Applying the same advanced techniques, this paper questions this conclusion by showing that the findings of the OECD studies seem to be not only not robust with respect to adding new observations but also likely to be plagued by a severe price bias which belittles the information content of the used financial indicator (stock market capitalization). We provide evidence that anticipative price effects (i. e., expectations of future growth, reflected in current stock prices) may be driving the empirical relationship between stock market activities and economic growth in high income countries to a much larger extent than recent analyses of the finance-growth link for OECD countries indicate.