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To study the role of financial development in economic growth, we apply an array of convergence tests designed to capture nonlinear transitional dynamics to real outputs per capita. Strong evidence of multiple convergence clubs is observed, implying that the clubs are formed based on the initial level of real output per capita and average growth rate. Our empirical results show that the stage of economic growth of each country plays an important role for the composition of the convergence clubs. Furthermore, financial development emerges to be a significant determinant, albeit plays differently in the economic growth of each convergence club.

The present paper investigates whether the link between stock markets, banks, and economic growth becomes more evident as more homogeneous groups of countries are considered. The dynamic panel generalized method of moment (GMM) estimator with Windmeijer (2005) correction is employed using data of European and non-European high-income countries as well as upper and lower middle-income countries averaged over five and three years. Our results indicate that the link between financial development and economic growth depends on the stages of economic growth of the countries. As more homogeneous economies are involved in a panel, a more economically stylized link is uncovered.