Financial Development and Economic Growth

IMF Working Papers, December 1, 1992

Source details

Canonical URL

Financial Development and Economic Growth

Other formats

• Markdown version
• Structured JSON version
• Bundle manifest

Bibliographic details

• Authors: Pablo Emilio Guidotti, Jose De Gregorio
• Published: December 1, 1992
• Series: IMF Working Papers
• DOI: https://doi.org/10.5089/9781451852455.001

Summary and central findings

• The paper examines the empirical relationship between long–run growth and the degree of financial development, proxied by the ratio of bank credit to the private sector as a fraction of GDP.
• Main empirical findings:
  • The financial development proxy "enters significantly and with a positive sign in growth regressions on a large cross–country sample."
  • The same proxy "enters with a negative sign using panel data for Latin America."
• Mechanism identified:
  • The main channel of transmission from financial development to growth is the efficiency of investment, rather than its volume.
• Theoretical contribution:
  • The authors present a model where "the negative correlation between financial intermediation and growth results from financial liberalization in a poor regulatory environment."

Empirical approach and interpretation

• Financial development proxy used:
  • Ratio of bank credit to the private sector as a fraction of GDP.
• Comparative empirical results:
  • Positive association in large cross–country sample regressions.
  • Negative association in Latin America panel data regressions.
• Interpretation emphasized by the authors:
  • Efficiency of investment is the principal channel linking financial development to growth; increases in financial intermediation do not necessarily raise investment volume but can affect how productively investment is allocated.
  • Regulatory environment and the process of financial liberalization can reverse expected benefits of financial intermediation, producing negative growth correlations under weak regulation.

Policy-relevant implications (as presented)

• Strengthening regulatory frameworks is implied to be critical when pursuing financial liberalization, given the model result that liberalization in a poor regulatory environment can produce a negative correlation between financial intermediation and growth.
• Focus policy assessment on how financial development affects the efficiency of investment, not only changes in aggregate investment volumes.

Metadata and classification

• Authors: Pablo Emilio Guidotti, Jose De Gregorio
• Publication date: December 1, 1992
• Series: Working Paper No. 1992/101
• Issue: 101
• Volume: 1992
• Pages: 37
• DOI: https://doi.org/10.5089/9781451852455.001
• ISBN: 9781451852455
• ISSN: 1018-5941
• Subjects: Banking, Capital productivity, Credit, Financial markets, Financial sector development, Financial services, Monetary aggregates, Money, Production, Real interest rates
• Keywords: Capital productivity, Credit, Eastern Europe, efficiency of investment, Financial sector development, financial system, high-productivity state of nature, investment rate, Monetary aggregates, PPP investment deflator, private sector, Real interest rates, representative bank, savings rate, WP

Source: "Financial Development and Economic Growth", Pablo Emilio Guidotti and Jose De Gregorio, IMF Working Papers 1992, 101 (1992), December 1, 1992.