Abstract
Financialisation, i.e., the process by which financial markets and their participants gain more influence over the functioning of enterprises/companies and the framework of the financial system, changes the functioning of the economic system, both at the macro- and microeconomic level. There is no doubt that financialisation impacts economic growth. Still, research does not substantiate the heterogeneity of financialisation effects and does not provide a comprehensive analysis of the sources of heterogeneity. In most cases, researchers provide only theoretical insights into what may lead to different effects of financialisation on economic growth. This study empirically examines whether institutional quality and economic development intermediate the relationship between financialisation and economic growth using a panel of 96 countries over the period of 1996–2017 and least squares dummy variables (LSDV) estimator. We found that the impact of financialisation on economic growth differs across countries and that institutional quality and economic development are the sources of the heterogeneous impact of financialisation on economic growth.
Highlights
IntroductionThe financial system’s share in economic, political, and social importance is growing, with increase in the volume of financial services provided to all economic entities and development of new financial instruments
This study aims to test the hypothesis that the heterogeneous impact of financialisation on long-run economic growth simultaneously depends on countries’ level of development and institutional quality
Though there have been many attempts to study the relationship between financialisation and economic growth, this study contributes to the literature by examining the heterogeneous impact of financialisation on long-run economic growth
Summary
The financial system’s share in economic, political, and social importance is growing, with increase in the volume of financial services provided to all economic entities and development of new financial instruments. Financialisation has changed the relationship between the financial sector and the real sector. The assets managed by companies and corporations are being transferred to the financial sector, as more and more attention is paid to shareholder value additions. Researchers have singled out several forms of financialisation: the development of financial markets (Godechot 2016; Hall and Soskice 2001; Streeck 2008; Greenwood and Scharfstein 2013), growth of the financial sector, non-financial corporations’ financialisation (Useem 1996; Fligstein 2002; Lapavitsas 2011, 2013; Heilbron et al 2014), and households’ financialisation (Martin 2003; Montagne 2006). The influence of the financial sphere emerged in the 20th century, and its impact on economy is the subject of many debates
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