Financialization and Growth nexus in the EU New member states (NMS): An ARDL Bounds Testing Approach and Granger causality analysis

Purpose - This study aims to explore the short-run and long run relationships and causality
between economic growth and financialization in NMS-11 and provide some policy
implications drawn from the empirical findings.

Design/methodology/approach – The ARDL bonds test approach to cointegration with
VEC model and CUSUMQ test for stability of functions are employed between 1995q1 and
2021q4 to examine existance of cointegration, relationships and causality between economic
growth and financialization.

Findings - The findings of the ARDL bounds test demonstrate that the variables included in
the models are bound together in the long run, as confirmed by the associated equilibrium
correction. The estimated models indicate that the association between selected variables and
economic growth is stronger and more statistically significant in the short run compared to
the long run. Also, for NMS-11 understudied countries short-run causality prevails over longrun causality. The changes in the level of financialization have a significant negative effect
on growth rates in the short run, which aligns with previous emirical studies.

Originality/ value - The study extends the existing very limited literature about short-run and
long run relationships and causality among economic growth and financialization, including
inflation and unemployment variables to determine their link in the NMS -11. Specifically,
the study reveals that the current level of financialization hampers economic growth and
promoting such economic policies further can have adverse effects on overall economic
growth.