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  • THE VANISHING EFFECT OF FINANCE ON ECONOMIC DEVELOPMENT

  • Klaus Gründler
  • Journal:
    Macroeconomic Dynamics / Volume 25 / Issue 2 / March 2021
    Published online by Cambridge University Press:
    26 July 2019, pp. 536-578

  • This paper examines the mechanisms that determine the “vanishing effect of finance” on economic growth found in recent studies. Based on both current (171 countries, 1960–2014) and historical (21 OECD countries, 1870–2009) data, the results show that financial development promotes growth in poorer countries by increasing education and investment, and by decreasing fertility. The relevance of these transmission channels declines when countries become richer. The growth effect of the financial sector in high-income countries primarily depends on new ideas and potentials for innovation projects. Consequently, the major decline in factor productivity growth since the early 2000s has contributed to the reduction in the financial sector’s average effect on growth.