An Empirical Reassessment of the Relationship Between Finance and Growth
Open Access
- 1 January 2003
- journal article
- Published by International Monetary Fund (IMF) in IMF Working Papers
- Vol. 3 (123)
- https://doi.org/10.5089/9781451854633.001
Abstract
This paper reexamines the empirical relationship between financial development and economic growth. It presents evidence based on cross-section and panel data using an updated dataset, a variety of econometric methods, and two standard measures of financial development: the level of liquid liabilities of the banking system and the amount of credit issued to the private sector by banks and other financial institutions. The paper identifies two sets of findings. First, in contrast with the recent evidence of Levine, Loayza, and Beck (2001), cross-section and panel-data-instrumental-variables regressions reveal that the relationship between financial development and economic growth is, at best, weak. Second, there is evidence of nonlinearities in the data, suggesting that finance matters for growth only at intermediate levels of financial development. Moreover, using a procedure appropriately designed to estimate long-run relationships in a panel with heterogeneous slope coefficients, there is no clear indication that finance spurs economic growth. Instead, for some specifications, the relationship is, puzzlingly, negative.Keywords
This publication has 35 references indexed in Scilit:
- GMM Estimation with persistent panel data: an application to production functionsEconometric Reviews, 2000
- A simple consistent bootstrap test for a parametric regression functionJournal of Econometrics, 1998
- Was Prometheus Unbound by Chance? Risk, Diversification, and GrowthJournal of Political Economy, 1997
- Growth and convergence in a multi-country empirical stochastic Solow modelJournal of Applied Econometrics, 1997
- Dynamic Linear Models for Heterogenous PanelsPublished by Springer Science and Business Media LLC ,1996
- Estimating long-run relationships from dynamic heterogeneous panelsJournal of Econometrics, 1995
- The role of macroeconomic factors in growthJournal of Monetary Economics, 1993
- Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment EquationsThe Review of Economic Studies, 1991
- Financial Intermediation and Endogenous GrowthThe Review of Economic Studies, 1991
- Financial Development, Growth, and the Distribution of IncomeJournal of Political Economy, 1990