An Empirical Reassessment of the Relationship Between Finance and Growth

June 1, 2003

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Format: Chicago

Giovanni Favara. An Empirical Reassessment of the Relationship Between Finance and Growth, (USA: International Monetary Fund, 2003) accessed November 21, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

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.

Subject: Econometric analysis, Economic and financial statistics, Economic sectors, Estimation techniques, Financial markets, Financial sector, Financial sector development, Financial statistics, Threshold analysis

Keywords: Africa, Dependent variable, Economic growth, Estimation techniques, Financial development, Financial sector, Financial sector development, Financial statistics, GMM estimator, Growth rate, Panel estimator, Panel methods, PMG estimator, Slope coefficient, System GMM estimator, Threshold analysis, Time series, Two-step estimator, Two-step GMM estimator, WP

Publication Details

Pages:

46
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2003/123
Stock No:

WPIEA1232003
ISBN:

9781451854633
ISSN:

1018-5941

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