Abstract
This study uses the quantile regression method developed by Koenker and Bassett (1978) to examine the asymmetric effect of financial intermediary development on economic growth in low- and high-income countries. A three-sector neoclassical growth model composed of a representative family sector, production sector, and the financial intermediary sector is constructed, and the equilibrium solutions determine the variables employed in the empirical model. The empirical results reveal an asymmetric relationship between financial intermediary development and economic growth. Financial intermediary development is the main driving force of economic growth for high-income countries only, not for low-income countries. Overall, this study suggests that countries should not develop financial intermediaries indiscriminately in the pursuit of economic expansion, especially for low-income countries. Our empirical findings have important policy implications for regulators who are especially concerned about countries’ sustainable economic growth.
Highlights
Past literature suggests that there exists a positive relationship between financial intermediary development and economic growth
We try to find potential determinants which significantly affect economic growth by constructing a three-sector endogenous growth model based on the Romer [1] model
After determining the factors influencing economic growth, we use quantile regression, introduced by Koenker and Basset [2], to examine the asymmetric effect of financial intermediary development on economic growth; that is, how financial intermediary development affects the different quantiles of the economic growth distribution
Summary
Past literature suggests that there exists a positive relationship between financial intermediary development and economic growth Another interesting issue is whether the development of financial institutions always has a positive influence on a country’s economic growth. Levine et al [7] suggested that financial intermediary development impacts positively on economic growth; the differences in accounting systems and legal origins among countries significantly account for different degrees of financial development. Previous studies indicate that the effect of bank liquidity risk on the relationship between financial intermediary development and economic growth after a financial crisis, such as those by Bencivenga and Smith [11] and Greenwood and Smith [12] Both Bencivenga and Smith [11] and Greenwood and Smith [12] reported that liquidity shocks affect individual savings, which subsequently change the GDP of a country. The remainder of this article is organized as follows: Section 2 presents the methodology, Section 3 describes the empirical results, and Section 4 discusses the conclusions
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