## Financial Development and Economic Growth

_IMF Working Papers, December 1, 1992_

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## 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

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### 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.*

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_Source: https://www.imf.org/en/publications/wp/issues/2016/12/30/financial-development-and-economic-growth-851_