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Is More Finance Better? Disentangling Intermediation and Size Effects of Financial Systems

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Author Info

  • Beck, T.H.L.
  • Degryse, H.A.
  • Kneer, E.C.

    (Tilburg University, Center for Economic Research)

Abstract

Abstract: Financial systems all over the world have grown dramatically over recent decades. But is more finance necessarily better? And what concept of finance – the size of the financial sector, including both intermediation and other auxiliary “non-intermediation” activities, or a focus on traditional intermediation activity – is relevant for its impact on real sector outcomes? This paper assesses the relationship between the size of the financial system and the degree of intermediation, on the one hand, and GDP per capita growth and growth volatility, on the other hand. Based on a sample of 77 countries for the period 1980-2007, we find that intermediation activities increase growth and reduce volatility in the long run. An expansion of the financial sectors along other dimensions has no long-run effect on real sector outcomes. Over shorter time horizons a large financial sector stimulates growth at the cost of higher volatility in high-income countries. Intermediation activities stabilize the economy in the medium run especially in low-income countries.

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Bibliographic Info

Paper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 2012-060.

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Date of creation: 2012
Date of revision:
Handle: RePEc:dgr:kubcen:2012060

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Web page: http://center.uvt.nl

Related research

Keywords: Financial intermediation; economic growth; growth volatility;

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References

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Citations

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Cited by:
  1. Thorsten Beck, 2012. "Concluding Observations," Chapters in SUERF Studies, SUERF - The European Money and Finance Forum.
  2. Stefano Pagliari, 2012. "Introduction," Chapters in SUERF Studies, SUERF - The European Money and Finance Forum.
  3. David T. Llewellyn, 2012. "The Evolution of Bank Business Models: Pre- and Post-crisis," Chapters in SUERF Studies, SUERF - The European Money and Finance Forum.
  4. Stefano Pagliari & Clive Briault & Alistair Milne & Patricia Jackson & Vicky Pryce & David T. Llewellyn & David Lascelles & Thorsten Beck, 2012. "Future Risks and Fragilities for Financial Stability," SUERF Studies, SUERF - The European Money and Finance Forum, number 2012/3 edited by David T. Llewellyn & Richard Reid.
  5. Patricia Jackson, 2012. "Basel III and Shadow Banking," Chapters in SUERF Studies, SUERF - The European Money and Finance Forum.
  6. David Lascelles, 2012. "Banking Banana Skins – Brief Remarks," Chapters in SUERF Studies, SUERF - The European Money and Finance Forum.
  7. Alistair Milne, 2012. "Supporting Market Discipline: The Case of a Bank Disclosure Council," Chapters in SUERF Studies, SUERF - The European Money and Finance Forum.
  8. Clive Briault, 2012. "Incentive Structures," Chapters in SUERF Studies, SUERF - The European Money and Finance Forum.
  9. Vicky Pryce, 2012. "Regulation and Competition in the Financial System," Chapters in SUERF Studies, SUERF - The European Money and Finance Forum.

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