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on Financial Development and Growth |
| By: | Michiel Bijlsma (CPB Netherlands Bureau for Economic Policy Analysis); Clemens Kool (CPB Netherlands Bureau for Economic Policy Analysis); Marielle Non (CPB Netherlands Bureau for Economic Policy Analysis) |
| Abstract: | The financial crisis has renewed interest in the finance-growth relationship. We analyze the empirical literature and find a moderate positive but decreasing effect of finance on growth. Empirical studies on the finance-growth relationship show a wide range of estimated effects. We perform a meta-analysis on in total 551 estimates from 68 empirical studies that take private credit to GDP as a measure for financial development and distinguish between linear and logarithmic specifications. First, we find evidence of significantly positive publication bias in both the linear and log-linear specifications. This contrasts with findings in two other recent meta-studies, possibly due to a distortion introduced by their transformation procedure. Second, the logarithmic estimates give a robust significantly positive average effect of financial development on economic growth after correction for publication bias. In our preferred specification a 10 percent increase in credit to the private sector increases economic growth with 0.09 percentage points. For the linear estimates, no significant effect of credit to the private sector on economic growth is found on average. Overall, the evidence points to a positive but decreasing effect of financial development on growth. |
| JEL: | E44 G10 G21 O16 O40 |
| Date: | 2017–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpb:discus:340&r=fdg |
| By: | Norman Loayza; Amine Ouazad; Romain Rancière |
| Abstract: | This paper reviews the evolving literature that links financial development, financial crises, and economic growth in the past 20 years. The initial disconnect—with one literature focusing on the effect of financial deepening on long-run growth and another studying its impact on volatility and crisis—has given way to a more nuanced approach that analyzes the two phenomena in an integrated framework. The main finding of this literature is that financial deepening leads to a trade-off between higher economic growth and higher crisis risk; and its main conclusion is that, for at least middle-income countries, the positive growth effects outweigh the negative crisis risk impact. This balanced view has been revisited recently for advanced economies, where an emerging and controversial literature supports the notion of "too much finance," suggesting that there might be a threshold beyond which financial depth becomes detrimental for economic growth by crowding out other productive activities and misallocating resources. Nevertheless, the growth/crisis trade-off is alive and strong for a large share of the world economy. Recognizing the intrinsic trade-offs of financial development can provide a useful framework to design policies targeting financial deepening, diversity, and inclusion. In particular, acknowledging the trade-offs can highlight the need for complementary policies to mitigate the risks, from financial macroprudential policies to monetary policy frameworks that monitor the growth of credit and asset prices. |
| JEL: | G01 G21 O0 O4 |
| Date: | 2018–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:24474&r=fdg |
| By: | Hiro Ito (Portland State University); Masahiro Kawai (Economic Research Institute for Northeast Asia (ERINA)) |
| Abstract: | Financial development is often measured by financial depth such as the stock of private credit and market capitalization as a share of GDP. Such a measure focuses on the quantity aspect of financial development. In this paper, we propose measures that capture both the quantity and quality aspects of financial market development. For quantity measures, we construct a composite index with multiple variables which gauge the size and depth of the banking, equity, bond, and insurance markets. For quality measures, we create a composite index that reflects the degree of financial market diversity, liquidity and efficiency, and the institutional environment. The last factor captures the development of legal systems and institutions, human capital, and information and telecommunications infrastructure. We find that the quantity and quality measures are highly correlated with each another for advanced economies and Asian emerging market economies, but not for other economies. The disaggregated components of the quality measures suggest that it is the level of legal and institutional development that differentiates advanced economies from emerging and developing economies in terms of the quality measures. Compared to advanced economies, emerging and developing economies tend to have low levels of market diversity, liquidity, and efficiency. Our simple regression analysis shows that the quality measure of financial development has a positive effect on output growth and negative effects on output volatility and inflation for the sample of emerging and developing economies with relatively high-quality financial development. We also observe that a higher level of financial development, particularly in terms of quality, tends to lead to greater financial openness, and that greater financial openness tends to be associated with low growth, high growth volatility and high inflation for emerging and developing economies with low quality measures of financial development, while such undesirable impacts of financial openness can be mitigated by raising the quality of financial development. |
| Keywords: | financial development, financial liberalization, financial openness |
| JEL: | E44 G2 O16 |
| URL: | http://d.repec.org/n?u=RePEc:eri:dpaper:1803&r=fdg |
| By: | Enrico D'Elia (Ministry of Economy and Finance); Roberta De Santis (ISTAT) |
| Abstract: | DThis paper analyzes trade and financial openness effects on growth and income inequality in 35 OECD countries. Our model takes into account both short run and long run effects of factors explaining income divergence between and within the countries. We estimate, for the period 1995-2016, an error correction model in which per capita GDP and inequality are driven by changes over time of selected factors and by the deviation from a long run relationship. Stylised facts suggest that trade and financial openness reduce the growth gaps across the countries but not income inequality, and the effects of finance are stronger in high income countries. Nevertheless, low and middle income countries benefit more from international trade. Our contribution to the existing literature is threefold: i) we study the short and long run effects of trade and financial openness on income level and distribution, ii) we focus on developed countries (OECD) rather than on developing and iii) we provide a sensitivity analysis including in our baseline equation an institutional indicator, a trade agreement proxy and a dummy of global financial crisis. Estimates results indicate that trade openness significantly improved the conditions of low income countries both in short and long run mostly, consistently with the catching up theory. It also decreased inequality, but only in low and middle income countries. Differently financial openness had a positive and significant impact only in the short run on middle income countries and increased income disparities within countries in the short term in low income countries and in the long term in high income countries. |
| Keywords: | Bank capitalization, zombie lending, capital misallocation |
| JEL: | D63 D31 H23 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:lui:lleewp:18140&r=fdg |
| By: | Simplice Asongu (Yaoundé/Cameroun); Nicholas Odhiambo (Pretoria, South Africa) |
| Abstract: | We analyze the evolution of fast emerging economies of the BRICS (Brazil, Russia, India, China & South Africa) and MINT (Mexico, Indonesia, Nigeria & Turkey) countries, by assessing growth determinants throughout the conditional distributions of the growth rate and real GDP output for the period 2001-2011. An instrumenal variable (IV) quantile regression approach is complemented with Two-Stage-Least Squares and IV Least Absolute Deviations. We find that the highest rates of growth of real GDP per head, among the nine countries of this study, corresponded to China, India, Nigeria, Indonesia and Turkey, but the highest increases in real GDP per capita corresponded, in descending order, to Turkey China, Brazil, South Africa and India. This study analyzes the impacts of several indicators on the increase of the rate of growth of real GDP and on the logarithm of the real GDP. We analyze several limitations of the methodology, related with the selection of the explained and the explanatory variables, the effect of missing variables, and the particular problems of some indicators. Our results show that Net Foreign Direct Investment, Natural Resources, and Political Stability have a positive and significant impact on the rate of growth of real GDP or on real GDP. |
| Keywords: | Economic Growth; Emerging countries; Quantile regression |
| JEL: | C52 F21 F23 O40 O50 |
| Date: | 2018–01 |
| URL: | http://d.repec.org/n?u=RePEc:agd:wpaper:18/013&r=fdg |
| By: | Davide Furceri; Prakash Loungani; Jonathan David Ostry |
| Abstract: | We take a fresh look at the aggregate and distributional effects of policies to liberalize international capital flows—financial globalization. Both country- and industry-level results suggest that such policies have led on average to limited output gains while contributing to significant increases in inequality—that is, they pose an equity–efficiency trade-off. Behind this average lies considerable heterogeneity in effects depending on country characteristics. Liberalization increases output in countries with high financial depth and those that avoid financial crises, while distributional effects are more pronounced in countries with low financial depth and inclusion and where liberalization is followed by a crisis. Difference-indifference estimates using sectoral data suggest that liberalization episodes reduce the share of labor income, particularly for industries with higher external financial dependence, those with a higher natural propensity to use layoffs to adjust to idiosyncratic shocks, and those with a higher elasticity of substitution between capital and labor. The sectoral results underpin a causal interpretation of the findings using macro data. |
| Date: | 2018–04–06 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:18/83&r=fdg |
| By: | Ashantha Ranasinghe; Diego Restuccia |
| Abstract: | Using cross-country micro establishment-level data we document that crime and lack of access to finance are two major obstacles to business operation in poor and developing countries. Using an otherwise standard model of production heterogeneity that integrates institutional differences in the degree of financial development and the rule of law, we quantify the effects of these institutions on aggregate outcomes and economic development. The model accounts for the patterns across establishments in access to finance and crime as obstacles to their operation. Weaker financial development and rule of law have substantial negative effects on aggregate output, reducing output per capita by 50 percent. Weak rule-of-law institutions substantially amplify the negative impact of financial frictions. While financial markets are crucial for development, an essential precondition to reap the gains from financial liberalization is that property rights are secure. |
| Keywords: | misallocation, establishments, financial frictions, rule of law, crime, micro data. |
| JEL: | O1 O4 |
| Date: | 2018–04–17 |
| URL: | http://d.repec.org/n?u=RePEc:tor:tecipa:tecipa-601&r=fdg |
| By: | Emanuele Ciola; EDOARDO GAFFEO; Mauro Gallegati |
| Abstract: | This paper develops a macroeconomic model of real- nancial market interactions in which the credit and the business cycles reinforce each other according to a bidirectional causal relationship. We do so in the context of a computational agent-based framework, where the channelling of funds from savers to investors occurring through intermediaries is a ected by information frictions. Since banks compete in both the deposit and the loan markets, the whole dynamics is driven by endogenous uctuations in the size of the intermediaries balance sheet. We use the model to show that nancial crisis are particularly harmful when hitting in phase with a real recession, and that when this occurs the loss in real output is permanent. |
| Keywords: | Agent-based model, matching frictions, banking, nancial crises |
| JEL: | E32 E37 G01 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:trn:utwprg:2018/05&r=fdg |