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

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Author Info
Friedrich Fritzer () (Oesterreichische Nationalbank)
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 of banks appears to be particularly important in earlier phases of economic development. (3) Initial real GDP per 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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Publisher Info
Article provided by Oesterreichische Nationalbank (Austrian Central Bank) in its journal Monetary Policy and the Economy.

Volume (Year): (2004)
Issue (Month): 2 (July)
Pages: 72-87
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Handle: RePEc:onb:oenbmp:y:2004:i:2:b:5

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Related research
Keywords: Financial Markets; growth;

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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  3. Mark G. Guzman, 2000. "The economic impact of bank structure: a review of recent literature," Economic and Financial Policy Review, Federal Reserve Bank of Dallas, issue Q2, pages 11-25. [Downloadable!]
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  14. Dean F. Amel & Colleen Barnes & Fabio Panetta & Carmelo Salleo, 2003. "Consolidation and Efficiency in the Financial Sector: A Review of the International Evidence," CEIS Research Paper 20, Tor Vergata University, CEIS. [Downloadable!]
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  20. Diego Romero de Ávila Torrijos, 2003. "Finance and growth in the EU - new evidence from the liberalisation and harmonisation of the banking industry," Working Paper Series 266, European Central Bank. [Downloadable!]
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