| By: |
Emiel F.S. van Bezooijen;
J.A. Bikker |
| Abstract: |
In 2015, the European Commission (EC) launched its action plan for the
creation of a European Capital Markets Union. The EC aims to return the
European economy to sustainable growth and to enhance its shock absorbing
capacity by reducing the reliance on bank finance and stimulating financial
deepening and cross-border integration of Europe’s capital markets.
Financial diversification and integrated European capital markets are expected
to improve risk sharing among households, supporting economic stability.
However, the economic literature reveals a lack of theoretical and empirical
consensus on the superiority of either a bank-based or a market-based
financial system in promoting growth or reducing macroeconomic volatility.
This paper is the first to include bond markets in its financial structure
indicators, besides stock markets and bank lending. Using panel data on 55
countries between 1975 and 2014 and three different measures of financial
structure, we investigate the effect of the structure of the financial system
on the volatility of output and investment growth as well as their cyclical
components. We do not find evidence that market-based financial structures
dampen volatility of output or overall investment. Increase of the stock
market size relative to that of the banking sector has a significant positive
effect on the business cycle volatility of investments. |
| Keywords: |
financial developmen, financial system structure, macroeconomic volatility, market-based finance, bank-based finance, capital market integration, business cycle |
| Date: |
2017–09 |
| URL: |
http://d.repec.org/n?u=RePEc:use:tkiwps:1713&r=fdg |