Empirical exercises in estimating the effects of different types of financial institutions’ functioning on economic growth

Abstract

While recent studies of the finance-growth nexus have focused on the use of proxies which more accurately capture the theorized functioning of the financial sector, they have tended to focus either on the functioning of the financial sector as a whole, or on the dominant institutions within the sector. Little attention has been paid to a comparison of the relative effects of different types of financial institutions on economic growth. This article attempts to get a deeper understanding of the finance-growth process by disaggregating the total financial sector impact and examining the individual and relative effects of each type of institution in the financial sector. We explore the empirical properties of alternative specifications of models of the impact of financial institutions’ functioning on economic growth, by conducting a number of exercises. These exercises experiment with various model specifications to represent the long- and short-run impacts of the financial institutions’ functioning on economic growth, using cointegration and error correction methodologies.