We re-study the relationship between financial development and real GDP per capita growth in 48 countries. What we find is an interesting evidence that only stock market development has positive effects on growth and that banking development has an unfavorable, if not negative, effect on growth. We examine whether or not these impacts are a product of various financial and economic conditional variables. Our conditional variables consist of financial liberalization, two sets of country development dummies, crises in banking and currency dummies, the creditor protection index as well as the anti-director and corruption indices. Our results clearly show that the conditional variables of financial liberalization, high-income level, and good shareholder protection mitigate the negative impacts of banking development on growth. In contrast, the conditional variables of middle-income level, regional Latin American, Sub-Saharan African and East Asian dummies, banking and currency crises, good creditor protection, and higher corruption strengthen the negative impacts of banking development on growth. Next, the conditional variables of middle-income level, Latin American, Sub-Saharan African, and East Asian dummies strengthen the positive impacts of stock market development on growth, whereas the conditional variables of financial liberalization mitigate the positive impacts of stock market development on growth. Last, we find that the relationship between growth and bank development is better described as a weak inverse Ushape. This inverse U-shape becomes stronger when additional stock market variables are squared. Thus, financial development and growth may, in fact, be in a nonlinear form.JEL codes: E44, G10, O16, O50 Keywords: stock market development, banking development, economic growth.The question as to whether financial development stimulates economic growth or whether the reverse causation is at play has spurred a The authors would like to thank the anonymous referees and the editor for their valuable suggestions and helpful comments which have greatly enhanced the quality of this paper. Any remaining errors, of course, belong to the authors. Please address correspondence to Chien-Chiang Lee.
