Understanding the correlation between stock market development and economic growth

This dissertation provides new insights into the relationship between stock market development and economic growth, drawing on the foundational framework of Levine and Zervos (1998) while incorporating more recent and broader data and augmenting their model with interaction terms to do richer analysis. Using a panel of countries between 1960 and 2021, aggregated in ten-year intervals, using a cross-country growth regression model, the empirical analysis examines both the direct impact of stock market development on economic growth and the indirect, conditional effects through interaction terms with variables such as institutional quality, income level, and government consumption. Our results support the findings of Levine and Zervos (1998) and highlight a positive correlation between stock market development and economic growth. However, our new findings indicate that this correlation is weaker in countries with larger governments or stronger institutions. Possible interpretations for these findings are also discussed in this thesis.