Abstract
•We revisit the relationship between financial development and economic growth.•Our analysis covers middle-income countries from 1980 to 2008.•We find an inverted U-shaped relationship between finance and growth in the long run.•The short-run relationship is insignificant.•This suggests a threshold beyond which financial development does not boost growth.
We revisit the relationship between financial development and economic growth in a panel of 52 middle-income countries over the 1980–2008 period. Using pooled mean group estimations in a dynamic heterogeneous panel setting, we show that there is an inverted U-shaped relationship between finance and growth in the long run. In the short run, the relationship is insignificant. This suggests that too much finance can exert a negative influence on growth in middle-income countries. The finding of a non-monotonic effect of financial development on growth is confirmed by estimating a threshold model.