Abstract
This paper examines the effect of financial development on countries’ production efficiency levels. By applying a probabilistic framework it develops robust (Order-m) time-dependent conditional nonparametric frontier estimators in order to measure 87 countries’ production efficiency levels over the period 1970–2014. In order to examine the effect of time and domestic credit on countries’ production efficiency levels, a second-stage nonparametric econometric analysis is performed. Specifically, generalized additive models with tensor products and cubic spline penalties are applied in order to investigate the potential nonlinear behavior of financial development on countries’ production efficiency levels. The results reveal that the effect of financial development on production efficiency is nonlinear. Specifically, the effect is positive up to a certain credit level after which it becomes negative. Finally, the evidence suggests that the effect is influenced by a country’s financial system, institutional, and development characteristics.
Highlights
The empirical evidence on countries’ economic growth paths emphasize the existence of nonlinear trends which are of great importance for policy implications and for further investigation (Liu and Stengos 1999; Kalaitzidakis et al 2001; Maasoumi et al 2007)
This paper investigates the effect of financial development on countries’ production efficiency levels using different nonparametric statistical and econometric methods
In a first stage analysis using different smoothing techniques and specific procedures for bandwidth selection (Bădin et al 2010, 2012, 2014), we apply a probabilistic approach of nonparametric frontier analysis
Summary
The empirical evidence on countries’ economic growth paths emphasize the existence of nonlinear trends which are of great importance for policy implications and for further investigation (Liu and Stengos 1999; Kalaitzidakis et al 2001; Maasoumi et al 2007) Such a nonlinear trend is evident when examining the impact of financial development on countries’ economic growth levels (Rousseau and Wachtel 2011; Arcand et al 2015). Mallick et al (2016) using a probabilistic framework of directional distance functions, provide evidence of a nonlinear effect of financial development on countries’ technological change and technological catch-up levels Based on this stream of research, this study further examines the effect of financial development on countries’ growth levels, by investigating in a robust nonparametric frontier setting its effect on countries’ production efficiency levels
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