Hostname: page-component-cd9895bd7-lnqnp Total loading time: 0 Render date: 2024-12-28T06:47:58.213Z Has data issue: false hasContentIssue false
  • English
  • Français

ON THE (NONMONOTONIC) RELATION BETWEEN ECONOMIC GROWTH AND FINANCE

Published online by Cambridge University Press:  06 June 2018

Alberto Bucci ,
Simone Marsiglio  and
Catherine Prettner
Alberto Bucci
Affiliation:
University of Milan
Simone Marsiglio*
Affiliation:
University of Wollongong
Catherine Prettner
Affiliation:
Statistics Austria and Vienna University of Economics and Business
*
Address correspondence to: Simone Marsiglio, School of Accounting, Economics and Finance, University of Wollongong, Northfields Avenue, Wollongong 2522 NSW, Australia; e-mail: [email protected].
Get access Rights & Permissions [Opens in a new window]

Abstract

We analyze the simplest possible model of endogenous growth to account for the role of financial development. In our setting, financial development affects productivity and determines the amount of resources subtracted to capital investment. We show that under very general assumptions, the relation between economic growth and financial depth is nonmonotonic, and eventually bell-shaped. We empirically assess our results in a framework that allows to distinguish between long-run and short-run effects. We establish a cointegrating relation and derive the long-run elasticities of per capita gross domestic product (GDP) with respect to employment, the physical capital stock, and financial depth–relying on linear as well as nonlinear models for the finance-growth nexus. We employ the results of the first step estimation to specify an error–correction model and find that there is strong evidence for a nonlinear relationship between financial depth and per capita GDP, consistently with what was predicted by our theoretical model.

Keywords

Economic GrowthFinancial DepthFinancial Development
Type
Articles
Information
Macroeconomic Dynamics , Volume 24 , Special Issue 1: Macroeconomic Modeling and Empirical Evidence in the Wake of the Crisis , January 2020 , pp. 93 - 112
Copyright
© Cambridge University Press 2018 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

We are indebted to an anonymous referee for valuable comments and suggestions. We also wish to thank the participants in the conference “Economics, Economic Policies and Sustainable Growth in the Wake of the Crisis” [Ancona (2016)] for insightful discussions. All remaining errors and omissions are our own sole responsibility.

References

Allen, F. (1990) The market for information and the origin of financial intermediaries. Journal of Financial Intermediation 1, 3–30.CrossRefGoogle Scholar
Allen, F., Babus, A., and Carletti, E. (2009) Financial crises: Theory and evidence. Annual Review of Financial Economics 1, 97–116.CrossRefGoogle Scholar
Allen, F., Carletti, E., Qian, J., and Valenzuela, P. (2014) Does finance accelerate or retard growth? Theory and evidence. In Allen, F., Behrman, J. R., Birdsall, N., Fardoust, S., Rodrik, D, Steer, A., and Subramanian, A. (eds.), Towards a Better Global Economy: Policy Implications for Citizens Worldwide, pp. 289–380. Oxford: Oxford University Press.Google Scholar
Arcand, J. L., Berkes, E., and Panizza, U. (2015) Too much finance? Journal of Economic Growth 20, 105–148.CrossRefGoogle Scholar
Beck, T. (2012) Finance and growth–-Lessons from the literature and the recent crisis, LSE Growth Commission.Google Scholar
Beck, T. (2013) Finance, growth and fragility: The role of government. International Journal of Banking, Accounting and Finance 5, 49–77.CrossRefGoogle Scholar
Beck, T., Levine, R., and Loayza, N. (2000) Finance and the sources of growth. Journal of Financial Economics 58, 261–300.CrossRefGoogle Scholar
Benhabib, J. and Spiegel, M. M. (2000) The role of financial development in growth and investment. Journal of Economic Growth 5, 341–360.CrossRefGoogle Scholar
Berlemann, M. and Wesselhoeft, J.-E. (2014) Estimating aggregate capital stocks using the perpetual inventory method. A survey of previous implementations and new empirical evidence for 103 countries. Review of Economics 65, 1–34.CrossRefGoogle Scholar
Boyd, J. H. and Prescott, E. C. (1986) Financial intermediary-coalitions. Journal of Economic Theory 38, 211–232.CrossRefGoogle Scholar
Breitung, J. (2005) A parametric approach to the estimation of cointegration vectors in panel data. Econometric Reviews 24, 151–173.CrossRefGoogle Scholar
Bucci, A. and Marsiglio, S. (2018) Financial Development and Economic Growth: Long Run Equilibrium and Transitional Dynamics, Scottish Journal of Political Economy, forthcoming, DOI: 10.1111/sjpe.12182CrossRefGoogle Scholar
Cecchetti, S. G. and Kharroubi, E. (2012) Reassessing the Impact of Finance on Growth. BIS working papers 381/2012.Google Scholar
Cihak, M., Demirguc–Kunt, A., Feyen, E., and Levine, R. (2012) Benchmarking Financial Systems Around the World. Policy Research working paper 6175, Washington, DC: World Bank.CrossRefGoogle Scholar
Christopoulos, D. K. and Tsionas, E. G. (2004) Financial development and economic growth: Evidence from panel unit root and cointegration tests. Journal of Development Economics 73, 55–74.CrossRefGoogle Scholar
De Gregorio, J. (1996) Borrowing constraints, human capital accumulation, and growth. Journal of Monetary Economics 37, 49–71.CrossRefGoogle Scholar
De Gregorio, J. and Kim, S.-J. (2000) Credit markets with differences in abilities: Education, distribution and growth. International Economic Review 41, 579–607.CrossRefGoogle Scholar
Greenwood, J. and Jovanovic, B. (1990) Financial development, growth, and the distribution of income. Journal of Political Economy 98, 1076–1108.CrossRefGoogle Scholar
Im, K. S., Pesaran, M. H., and Shin, Y. (2003) Testing for unit roots in heterogeneous panels. Journal of Econometrics 115, 53–74.CrossRefGoogle Scholar
King, R. G. and Levine, R. (1993a) Finance and growth: Schumpeter might be right. Quarterly Journal of Economics 108, 717–737.CrossRefGoogle Scholar
King, R. G. and Levine, R. (1993b) Finance, entrepreneurship and growth: theory and evidence. Journal of Monetary Economics 32, 513–542.CrossRefGoogle Scholar
Law, S. H. and Singh, N. (2014) Does too much finance harm economic growth?. Journal of Banking & Finance 41, 36–44.CrossRefGoogle Scholar
Levin, A., Lin, C.-F., and Chu, C.-S. James (2002) Unit root tests in panel data: Asymptotic and finite-sample properties. Journal of Econometrics 108, 1–24.CrossRefGoogle Scholar
Levine, R. (2005) Finance and growth: Theory and evidence. In Aghion, P. and Durlauf, S. N. (eds.), Handbook of Economic Growth, pp. 866–934. Amsterdam: Elsevier North-Holland.Google Scholar
Levine, R., Loayza, N., and Beck, T. (2000) Financial intermediation and growth: Causality and causes. Journal of Monetary Economics 46, 31–77.CrossRefGoogle Scholar
Levine, R. and Zervos, S. (1998) Stock markets, banks, and economic growth. American Economic Review 88, 537–558.Google Scholar
Loayza, N. and Ranciere, R. (2006) Financial development, financial fragility, and growth. Journal of Money, Credit and Banking 38, 1051–1076.CrossRefGoogle Scholar
Morales, M. F. (2003) Financial intermediation in a model of growth through creative destruction. Macroeconomic Dynamics 7, 363–393.CrossRefGoogle Scholar
Pagano, M. (1993) Financial markets and growth: An overview. European Economic Review 37, 613–622.CrossRefGoogle Scholar
Pedroni, P. (1999) Critical values for cointegration tests in heterogeneous panels with multiple regressors. Oxford Bulletin of Economics and Statistics 61, 653–670.CrossRefGoogle Scholar
Pedroni, P. (2004) Panel cointegration: Asymptotic and finite sample properties of pooled time series tests with an application to the PPP hypothesis. Econometric Theory 20, 597–625.CrossRefGoogle Scholar
Saikkonen, P. (1991) Asymptotically efficient estimation of cointegration regressions. Econometric Theory 7, 1–21.CrossRefGoogle Scholar
Trew, A. (2008) Efficiency, depth and growth: Quantitative implications of finance and growth theory. Journal of Macroeconomics 30, 1550–1568.CrossRefGoogle Scholar
Trew, A. (2014) Finance and balanced growth. Macroeconomic Dynamics 18, 883–898.CrossRefGoogle Scholar
Wagner, M. and Hlouskova, J. (2010) The performance of panel cointegration methods: Results from a large scale simulation study. Econometric Reviews 29, 182–223.CrossRefGoogle Scholar
Wu, J. L., Hou, H., and Cheng, S. Y. (2010) The dynamic impacts of financial institutions on economic growth: Evidence from the European Union. Journal of Macroeconomics 32, 879–891.CrossRefGoogle Scholar