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Too much finance or too many weak instruments?

Author

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  • Maxime Fajeau

Abstract

Since the global financial crisis of 2008, a strand of the literature has documented a threshold beyond which financial development tends to affect growth adversely. However, the The evidence rests heavily on internal instrument identification strategies, whose reliability has received surprisingly little attention so far in the finance-growth literature. Therefore, the present paper conducts a reappraisal of the non-linear conclusion twofold. First, in light of new data, second, by a thorough assessment of the identification strategy. Evidence points out that a series of unaddressed issues affecting the system-gmm setup results in spurious threshold regressions and overfitting of outliers.

Suggested Citation

  • Maxime Fajeau, 2021. "Too much finance or too many weak instruments?," International Economics, CEPII research center, issue 165, pages 14-36.
    • Handle: RePEc:cii:cepiie:2021-q1-165-3
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    File URL: https://www.sciencedirect.com/science/article/pii/S2110701720302717
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    Citations

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    Cited by:

    1. Krinichansky, Konstantin & Yurevich, Maksim, 2023. "Finance and growth: Nonlinearity and structural shifts," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 72, pages 5-22.

    More about this item

    Keywords

    Finance; Growth; Non-linearity; System GMM; Panel data;
    All these keywords.

    JEL classification:

    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G1 - Financial Economics - - General Financial Markets
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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