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Abstract
This paper investigates the threshold effects of financial development on economic growth in D-8 countries for the period of 1980 to 2011, using Panel Smooth Transition Regression (PSTR) model as one of the most prominent regime-switching models. For this end, domestic credit to private sector as percent of GDP is used as a financial development indicator and transition variable. The linearity test results indicate strongly nonlinear relationship among variables under consideration. Moreover, considering one transition function and one threshold parameter, as a two regime model, is sufficient to specification of nonlinear relationship among variables. The results indicate that threshold value is 26.55 percent and the estimated slope parameter is 0.24. In the first regime, financial development has a negative impact on economic growth. Beyond threshold value, in the second regime, the impact of financial development is positive and very low. Therefore, financial development has not played an important role in the process of economic growth in D-8 countries, and its influence is even very low with advancement of financial development.
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