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Financial Development and Growth: A Positive, Monotonic Relationship?

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Author Info
Felix Rioja () (Andrew Young School of Policy Studies, Georgia State University)
Neven Valev () (Andrew Young School of Policy Studies, Georgia State University)

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Abstract

The relationship between financial development and economic growth has received a lot of attention in the economic literature in recent years. The consensus finding, which has also become widely accepted by policymakers, is that financial development has a positive, monotonic effect on growth. In this paper, we propose that the relationship between financial development and growth may not be uniform, but varies according to the level of financial development of the country. In particular, we hypothesize that there exist three distinct regions of financial development. In the low region (countries with very low levels of financial development), additional improvements in financial markets have an uncertain effect on growth. In the intermediate region, financial development has a large, positive effect on growth. Finally, in the high region, additional financial improvements have a positive, but smaller effect on growth. We examine a panel of 74 countries using GMM dynamic panel techniques and find support for the different regions.

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Paper provided by International Studies Program, Andrew Young School of Policy Studies, Georgia State University in its series International Studies Program Working Paper Series, at AYSPS, GSU with number paper0207.

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Length: 28 pages
Date of creation: 01 May 2002
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Handle: RePEc:ays:ispwps:paper0207

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Keywords: financial development economic growth

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  7. Beck, Thorsten & Levine, Ross & Loayza, Norman, 2000. "Finance and the sources of growth," Journal of Financial Economics, Elsevier, vol. 58(1-2), pages 261-300. [Downloadable!] (restricted)
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  10. Berthelemy, Jean-Claude & Varoudakis, Aristomene, 1996. "Economic Growth, Convergence Clubs, and the Role of Financial Development," Oxford Economic Papers, Oxford University Press, vol. 48(2), pages 300-328, April. [Downloadable!] (restricted)
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  15. Levine, Ross, 1998. "The Legal Environment, Banks, and Long-Run Economic Growth," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 30(3), pages 596-613, August.
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  17. L. Zanforlin & Alberto Chong, 1999. "Technology and Epidemics," IMF Working Papers 99/125, International Monetary Fund.
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