Financial Development and Economic Growth
December 1, 1992
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Summary
This 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. We find that this proxy enters significantly and with a positive sign in growth regressions on a large cross–country sample, but with a negative sign using panel data for Latin America. Our findings suggest that the main channel of transmission from financial development to growth is the efficiency of investment, rather than its volume. We also present a model where the negative correlation between financial intermediation and growth results from financial liberalization in a poor regulatory environment.
Subject: 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
Pages:
37
Volume:
1992
DOI:
Issue:
101
Series:
Working Paper No. 1992/101
Stock No:
WPIEA1011992
ISBN:
9781451852455
ISSN:
1018-5941
