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Is more finance better? Disentangling intermediation and size effects of financial systems

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  • Beck, Thorsten
  • Degryse, Hans
  • Kneer, Christiane
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    Abstract

    Financial systems all over the world have grown dramatically over recent decades. But is more finance necessarily better? And what concept of financial system – a focus on its size, including both intermediation and other auxiliary “non-intermediation” activities, or a focus on traditional intermediation activity – is relevant for its impact on real sector outcomes? This paper assesses the relationship between the size of the financial system and intermediation, on the one hand, and GDP per capita growth and growth volatility, on the other hand. Based on a sample of 77 countries for the period 1980–2007, we find that intermediation activities increase growth and reduce volatility in the long run. An expansion of the financial sectors along other dimensions has no long-run effect on real sector outcomes. Over shorter time horizons a large financial sector stimulates growth at the cost of higher volatility in high-income countries. Intermediation activities stabilize the economy in the medium run especially in low-income countries. As this is an initial exploration of the link between financial system indicators and growth and volatility, we focus on OLS regressions, leaving issues of endogeneity and omitted variable biases for future research.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Financial Stability.

    Volume (Year): 10 (2014)
    Issue (Month): C ()
    Pages: 50-64

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    Handle: RePEc:eee:finsta:v:10:y:2014:i:c:p:50-64

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    Web page: http://www.elsevier.com/locate/jfstabil

    Related research

    Keywords: Financial intermediation; Financial sector size; Finance-growth nexus; Volatility;

    References

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    Cited by:
    1. Jérôme Creel & Paul Hubert & Fabien Labondance, 2013. "Financial stability and economic performance," Sciences Po publications 2013-24, Sciences Po.
    2. repec:spo:wpecon:info:hdl:2441/f6h8764enu2lskk9p5296ie95 is not listed on IDEAS

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