The finance-growth nexus in ceec: New evidence from a survey-based indicator of external financial dependence

Following Rajan and Zingales's (1998) pioneering study, many empirical studies have tested the differential growth effects of a country's financial development across various industries with different levels of dependence on external financing. To conduct this test, many researchers have used the Rajan Zingales (1998) exogenous indicator to measure each industries' external financial dependence, which is computed using balance-sheet data from quoted US firms from the 1980's As shown in the literature, this indicator might create bias when estimating the relationship between a country's financial development and its economic growth. We suggest a new indicator based on the new EU-Efige/Bruegel-UniCredit survey database, which explicitly asks entrepreneurs to indicate their perception of the industry's need for external financing. We then estimate the relationship between financial development and economic growth by analyzing a sample of Central and Eastern European economies during the past decade.