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Financial Market Structure and Economic Growth: A Cross-Country Perspective

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Abstract

The paper contributes to understanding the impact of financial system indicators on economic growth. A particular emphasis is placed on financial structure indicators, which measure the specific organization of the financial system, namely, banking sector concentration, foreign bank penetration, government regulation and the efficiency of the banking industry - as opposed to depth indicators, which measure financial market liquidity. In this respect (1) the concentration of banks was found to have a detrimental impact on growth. However, concentration may also have indirect and positive impacts on growth depending on a countries initial stage of economic development, i.e. for comparatively more developed countries, the negative impact of concentration on long-run growth is lower. (2) Financial liquidity indicators, which work through both physical capital accumulation and total factor productivity, have a strong impact on economic growth. The catalyst role capita, finally, determines the growth path of an economy. Low initial real GDP is positively related to the growth path of economies in terms of the "latecomer advantage". Given the detrimental effects of banking sector concentration on economic growth, a tentative policy conclusion would be that antitrust authorities should strive to maintain competitively structured markets. In order to increase competition in an environment subject to mergers, which significantly reduce the number of financial services providers, obstacles to the mobility of customers should be removed, for example by setting and enforcing transparency rules regarding products and prices for financial services.

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File URL: http://www.oenb.at/dms/oenb/Publikationen/Volkswirtschaft/Monetary-Policy-and-the-Economy/2004/Monetary-Policy-and-the-Economy-Q2-04/chapters/mop_20042_financial_market_tcm16-19681.pdf
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Bibliographic Info

Article provided by Oesterreichische Nationalbank (Austrian Central Bank) in its journal Monetary Policy & the Economy.

Volume (Year): (2004)
Issue (Month): 2 ()
Pages: 72–87

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Handle: RePEc:onb:oenbmp:y:2004:i:2:b:4

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Keywords: Financial Markets; growth;

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  1. Robert J. Shiller, 1998. "Social Security and Institutions for Intergenerational, Intragenerational, and International Risk Sharing," JCPR Working Papers 43, Northwestern University/University of Chicago Joint Center for Poverty Research.
  2. Palmer, Edward, 2000. "The Swedish pension reform model : framework and issues," Social Protection Discussion Papers 23086, The World Bank.
  3. Valdes-Prieto, Salvador, 2000. " The Financial Stability of Notional Account Pensions," Scandinavian Journal of Economics, Wiley Blackwell, vol. 102(3), pages 395-417, June.
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