Abstract
We present new cross‐country evidence that reveals that during 1995–2007, government ownership of banks has been robustly associated with higher long‐run growth rates. We also show that previous results suggesting that government ownership of banks is associated with lower long‐run growth rates are not robust to conditioning on more ‘fundamental’ determinants of economic growth.
Highlights
In their attempt to prevent financial meltdown in the autumn of 2008, governments in many industrialised countries took large stakes in major commercial banks
The political view of government banks was purportedly backed by empirical evidence in a paper by La Porta, Lopez-de-Silanes and Shleifer (2002)— LLS—which utilises cross-country regressions that uncover a negative association between government ownership of banks and average growth rates
Including regulatory quality in the focus group can be rationalised by alluding to the literature that emphasises institutions as a fundamental determinant of economic growth, and is consistent with the uniformly highly significant coefficients found for institutional quality in Tables 1, 2 and 3
Summary
In their attempt to prevent financial meltdown in the autumn of 2008, governments in many industrialised countries took large stakes in major commercial banks. We show that the LLS results, which pertain to an earlier period, are fragile to extending the set of conditioning variables to include more ‘fundamental’ determinants of economic growth such as institutional quality / quality of governance (Acemoglu, Johnson and Robinson 2005), which previous empirical literature has found to be significant (Knack and Keefer 1995, Hall and Jones 1999, Acemoglu, Johnson and Robinson 2001, Rodrik, Subramanian and Trebbi 2004, Demetriades and Law 2006) These new findings suggest that the support which the ‘political’ view of government banks has previously received from cross-country regressions is fragile..
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