Too Cold, Too Hot, or Just Right? Assessing Financial Sector Development Across the Globe

Author/Editor: Adolfo Barajas ; Thorsten Beck ; Era Dabla-Norris ; Reza Yousefi
Publication Date: March 28, 2013
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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 introduces the concept of the financial possibility frontier as a constrained optimum level of financial development to gauge the relative performance of financial systems across the globe. This frontier takes into account structural country characteristics, institutional, and macroeconomic factors that impact financial system deepening. We operationalize this framework using a benchmarking exercise, which relates the difference between the actual level of financial development and the level predicted by structural characteristics, to an array of policy variables. We also show that an overshooting of the financial system significantly beyond levels predicted by its structural fundamentals is associated with credit booms and busts.
Series: Working Paper No. 13/81
Subject(s): Financial systems | Financial sector | Banks | Cross country analysis

Publication Date: March 28, 2013
ISBN/ISSN: 9781484351086/1018-5941 Format: Paper
Stock No: WPIEA2013081 Pages: 30
US$18.00 (Academic Rate:
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