The Effect of Financial Development on Economic Growth among the Central and Eastern European Countries

To control for the endogeneity problem, this study applies the two-stage least squares technique to examine the impact of bank and stock market development on economic growth in the thirteen Central and Eastern European (CEE) countries in the European Union (EU) during 2001–2020. The first hypothesis states that the higher bank development has not contributed to higher growth in the CEE countries. The overall results only support the hypothesis for the subperiod of 2001–2009. The second hypothesis states that the higher stock market development has not spurred growth in the CEE countries. The overall results support the hypothesis over the entire period of 2001–2020. Finally, despite the CEE integration with the EU developed countries for the past decades, there is a very limited number of empirical studies on the finance–growth relationship in the CEE countries. This study contributes to the relevant literature by examining the bank and stock market development’s relationship with growth in the CEE developing countries.