By using econometric techniques for dynamic heterogeneous panels, the paper provides evidence about the impact that the degree of financial development - proxied by the stock of credit to the private sector, stock market capitalization and the outstanding amount of international debt securities - may have on economic development. This is measured by the yearly growth rate of real per capita GDP in a sample of 19 central and eastern European economies.
In the sample of countries, the econometric analysis finds evidence of nonlinearities in the relationship between financial development and growth. Specifically, results point to an inverted U-shaped relationship between bank credit and growth, whereas stock market capitalization and the stock of international debt securities display a monotone and positive relationship with economic performance.
