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Financial Intermediation and Growth: Causality and Causes

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  • Thorsten Beck
  • Ross Levine
  • Norman Loayza

Abstract

This paper evaluates (1) whether the exogenous component of financial intermediary development influences economic growth and (2) whether cross-country differences in legal and accounting systems (e.g., creditor rights, contract enforcement, and accounting standards) explain differences in the level of financial development. Using both traditional cross-section, instrumental variable procedures and recent dynamic panel techniques, we find that the exogenous component of financial intermediary development is positively associated with economic growth. Also, the data show that cross-country differences in legal and accounting systems help account for differences in financial development. Together, these findings suggest that legal and accounting reforms that strengthen creditor rights, contract enforcement, and accounting practices can boost financial development and accelerate economic growth.

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Paper provided by Central Bank of Chile in its series Working Papers Central Bank of Chile with number 56.

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Date of creation: Dec 1999
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Handle: RePEc:chb:bcchwp:56

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