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Finance Causes Growth: Can We Be So Sure?

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  • Manning Mark J

    ()
    (University College London)

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    Abstract

    In recent years, a number of studies have found in favour of a causal link between finance and growth. This paper examines the empirical foundations of such studies, performing some additional econometric tests using the datasets and methodologies of Rajan and Zingales (1998a) and Levine and Zervos (1998). First, we consider the stability of published results across countries at different stages in their economic development, re-estimating Rajan and Zingales’ specification to allow separate coefficients for OECD and non-OECD member countries. We find that finance has a greater impact upon growth in non-OECD countries, with bank finance of particular importance. Second, we explore the issue of identification, concluding that it is difficult to disentangle the effect of financial development from that of other correlated factors. In particular, we show that the results of these authors depend heavily on the strong performance of the ‘Tiger’ economies during the 1980s.

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    Bibliographic Info

    Article provided by De Gruyter in its journal The B.E. Journal of Macroeconomics.

    Volume (Year): 3 (2003)
    Issue (Month): 1 (December)
    Pages: 1-24

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    Handle: RePEc:bpj:bejmac:v:contributions.3:y:2003:i:1:n:12

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    Cited by:
    1. Paul Wachtel & Peter L. Rousseau, 2010. "Economic Growth and Financial Depth: Is the Relationship Extinct Already?," Working Papers id:3225, eSocialSciences.
    2. Max Gillman & Mark N Harris & Michal Kejak, 2007. "The Interaction of Inflation and Financial Development with Endogenous Growth," Money Macro and Finance (MMF) Research Group Conference 2006 29, Money Macro and Finance Research Group.
    3. Paul Wachtel & Peter L. Rousseau, 2006. "What is happening to the impact of financial deepening on economic growth?," Working Papers 06-15, New York University, Leonard N. Stern School of Business, Department of Economics.
    4. Francesco Aiello & Camilla Mastromarco & Angelo Zago, 2008. "Be productive or face decline. On the sources and determinants of output growth in Italian manufacturing firms," Working Papers 46/2008, University of Verona, Department of Economics.
    5. Andrea Vaona, 2006. "Regional Evidence on the Finance - Growth Nexus," Kiel Working Papers 1285, Kiel Institute for the World Economy.
    6. Alex Trew, 2007. "Efficiency, Depth and Growth: Quantitative Implications of Finance and Growth Theory," CDMA Working Paper Series 200712, Centre for Dynamic Macroeconomic Analysis.
    7. Coccorese, Paolo, 2008. "An investigation on the causal relationships between banking concentration and economic growth," International Review of Financial Analysis, Elsevier, vol. 17(3), pages 557-570, June.
    8. Ross Mcleod, 2006. "Indonesia's new deposit guarantee law," Bulletin of Indonesian Economic Studies, Taylor & Francis Journals, vol. 42(1), pages 59-78.
    9. Kar, Muhsin & NazlIoglu, Saban & AgIr, Hüseyin, 2011. "Financial development and economic growth nexus in the MENA countries: Bootstrap panel granger causality analysis," Economic Modelling, Elsevier, vol. 28(1-2), pages 685-693, January.
    10. Ramírez, Carlos D., 2009. "Bank fragility, "money under the mattress", and long-run growth: US evidence from the "perfect" Panic of 1893," Journal of Banking & Finance, Elsevier, vol. 33(12), pages 2185-2198, December.

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