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The Evolution of the Finance Growth Nexus

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  • Paul Wachtel

    ()
    (Stern School of Business, New York University, 44 West 4th Street, New York, NY 10012, USA.)

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    Abstract

    The role of the financial sector in economic growth received scant attention from economists until very recently. An explosion of research in the last 20 years has firmly entrenched the finance growth nexus in the canon of economic beliefs. This paper suggests that the literature might have over emphasised the strength of the nexus that is much more nuanced than often suggested. The most commonly used measure of financial sector development, financial depth, is difficult to interpret because it can be a reflection of economy wide leverage as well as the quality and quantity of intermediation. Our examination of experience with financial deepening and of other measures of financial activity such as value added does not suggest that finance is unimportant. Instead, it shows how difficult it is to measure financial sector activity adequately.

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    Bibliographic Info

    Article provided by Palgrave Macmillan in its journal Comparative Economic Studies.

    Volume (Year): 53 (2011)
    Issue (Month): 3 (September)
    Pages: 475-488

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    Handle: RePEc:pal:compes:v:53:y:2011:i:3:p:475-488

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    1. Martin Neil Baily & Robert J. Gordon, 1988. "The Productivity Slowdown, Measurement Issues, and the Explosion of Computer Power," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 19(2), pages 347-432.
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    3. Levine, Ross, 1996. "Financial development and economic growth : views and agenda," Policy Research Working Paper Series, The World Bank 1678, The World Bank.
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    6. Steven Radelet & Jeffrey D. Sachs, 1998. "The East Asian Financial Crisis: Diagnosis, Remedies, Prospects," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 29(1), pages 1-90.
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    8. Carmen M. Reinhart & Vincent R. Reinhart, 2010. "After the fall," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, Federal Reserve Bank of Kansas City, pages 17-60.
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    10. Rousseau, Peter L & Wachtel, Paul, 1998. "Financial Intermediation and Economic Performance: Historical Evidence from Five Industrialized Countries," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 30(4), pages 657-78, November.
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    Cited by:
    1. Hasan, Iftekhar & Song, Liang & Wachtel , Paul, 2013. "Institutional development and stock price synchronicity: Evidence from China," BOFIT Discussion Papers, Bank of Finland, Institute for Economies in Transition 20/2013, Bank of Finland, Institute for Economies in Transition.
    2. Thorsten Beck, 2013. "Finance, growth and fragility: the role of government," International Journal of Banking, Accounting and Finance, Inderscience Enterprises Ltd, Inderscience Enterprises Ltd, vol. 5(1/2), pages 49-77.
    3. Zhang, Lu & Grydaki, Maria & Bezemer, Dirk, 2014. "Is Financial Development Bad for Growth?," Research Report, University of Groningen, Research Institute SOM (Systems, Organisations and Management) 14016-GEM, University of Groningen, Research Institute SOM (Systems, Organisations and Management).

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