The Role of Financial Development on Convergence:evidence from Eastern European and Central Asian Countries

Abstract: Although departing from similar initial conditions, twenty years later the beginning of the transition Eastern European and Central Asian countries appear to be characterized by remarkably heterogeneous growth performances. In the light of the causal relationship between finance and growth, this article examines, first, whether the lack of convergence in these economies' GDP – per capita growth rates may be a side - effect of as well diversified financial architectures. To this aim, we investigate the occurrence of absolute and conditional convergence with reference to credit market development, as measured by the amount of credit provided to the private sector on GDP. Our findings show a tendency toward convergence, and thus a reduction in the heterogeneity of countries' financial market development. Then, to precisely address the relationship between patterns of financial development and convergence in GDP – per capita growth rates for our sample of economies, we investigate whether there exists a threshold of credit market development such to promote convergence in GDP – per capita growth rates. Actually, we find that this threshold exists and that economies with a level of financial development above this threshold converge to the growth rate of the best performing country of the sample while the others have a strictly lower long - run growth rate.