Abstract
We assess the relationship between finance and growth over the period 1980-2014. We estimate a cross-country growth regression for 48 countries during 20 periods of 15 years starting in 1980 (to 1995) and ending in 1999 (to 2014). We use OLS and IV estimations and we find that: 1) overall financial development had a positive effect on economic growth during all periods of our sample, i.e., we confirm that from 1980 to 2014 financial services provided by the various financial systems were significant (to various degrees) for firm creation, industrial expansion and economic growth; but that, 2) the structure of financial markets was particularly relevant for economic growth until the financial crisis; while 3) the structure of the banking sector played a major role since; and finally that, 4) the legal system is the primary determinant of the effectiveness of the overall financial system in facilitating innovation and growth in (almost) all of our sample period. Hence, overall our results suggest that the relationship between finance and growth matters but also that it varies over time in strength and in sector origination.
Highlights
We estimate growth regressions using an Instrumental Variable (IV) approach and wend that (1) overallnancial development had a positive e®ect on economic growth for almost all our studied periods, (2) the legal system is the primary determinant of the e®ectiveness of the overallnancial system, and (3) ̄nancial services were relevant for economic growth even during thenancial crisis of 2008
Arcand et al (2015) examine whether there is a threshold above whichnancial depth no longer has a positive e®ect on economic growth
Wend that (1) overallnancial development had a positive e®ect on economic growth for almost all our periods, (2) the legal system is the primary determinant of the e®ectiveness of the overallnancial system, and (3) ̄nancial services were relevant for economic growth even during thenancial crisis of 2008
Summary
They alsond thatnancial development helps to predict the rate of economic growth of countries for the following 10–30 years Their results are consistent with Schumpeter's view: \services provided bynancial intermediaries stimulate long run growth" Since a systemic risk perspective, the World Bank (2013) points thatnancial system supports risk management by o®ering variousnancial toolse to people and their support systems (Households, the community, enterprises, the state, and even the international community), but the systemic risk could arise from the procyclicalf d \Economies grow faster, industries depending heavily on externalnance expand at faster rates, newrms form more ̄rm's access to externalnancing is easier, andrms grow more rapidly in economies with higher levels of overallnancial-sector development and in countries with legal systems that more e®ectively protect the rights of outside investors" Since a systemic risk perspective, the World Bank (2013) points thatnancial system supports risk management by o®ering variousnancial toolse to people and their support systems (Households, the community, enterprises, the state, and even the international community), but the systemic risk could arise from the procyclicalf d \Economies grow faster, industries depending heavily on externalnance expand at faster rates, newrms form more ̄rm's access to externalnancing is easier, andrms grow more rapidly in economies with higher levels of overallnancial-sector development and in countries with legal systems that more e®ectively protect the rights of outside investors" (Beck et al 2001, p. 233). e \For example, payment and foreign exchange services, saving instruments (bank deposits and liquid securities), credit, market insurance, debt and equity investments, risk-taking capital, public trading of assets, and risk pricing information" (World Bank 2013, p. 194). f \ do thenancial and real cycles move together but banking crises can spill over to macroeconomic crises or be triggered by a spillover from macroeconomic crises" (op cit., p. 204)
Sign-in/Register to view highlights & summary Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
