Department of Economics

Financial Development and Economic Growth in Transition Economies: Empirical Evidence from the CEE and CIS Countries

Department of Economics
University of Delaware
Working Paper #2011-22

Financial Development and Economic Growth in Transition Economies: Empirical Evidence from the CEE and CIS Countries

Laura Cojocaru*, Saul D.Hoffman* and Jeffrey B.Miller*

ABSTRACT

We examine the role of financial development in economic growth in the former Communist countries of Central and Eastern Europe and the Commonwealth of Independent States during the first two decades since the beginning of transition. These countries, which had undeveloped financial systems under Communism, provide an interesting test of the relationship between financial development and growth. We show that credit to the private sector had a positive effect on growth in these countries; however, high levels of inflation can render the positive effect of private credit insignificant. High interest rate spreads and reduced banking competition hampered economic growth.

JEL Codes:O16, P27, P34

Keywords:  transition economies, CEE, CIS, financial sector development, economic growth

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