Are financial activities harmful for regional growth? Contradictory evidence from the Indonesian panel data

Abstract

Using high-frequency panel data for Indonesian provinces, we find that financial activities are associated with slower growth rates of productivity and output per capita. In particular, bank credit alone appears to inhibit growth more than the impact of credit and financial savings combined. This result contrasts starkly with the evidence from low-frequency panel, where the estimates suggest that bank credit promotes faster productivity and higher growth of per capita output. The contradictory evidence is attributable to the nonlinear growth dynamics of the finance-output nexus, where credit inhibits growth in the short run and promotes growth over the longer haul.