Financial Development, Economic Growth and Poverty Reduction: Cross-Country Evidence (Low Income Countries)

Abstract

This work is devoted to analysis of a direct relationship between poverty and financial development. The empirical model applies a panel data estimation technique called Random Effects (RE). In order to control the possible problems with reverse causation this research employs instrumental variables (IV) and for estimation of IV two-stage least square (2SLS) model is used. Using panel data for 36 low-income countries from 1961-2012 this study finds that financial development is helpful for poverty reduction. This outcome is supported by two measures of financial development namely the ratio of money to GDP (M2-GDP) and the ratio deposit to GDP.