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The finance-growth nexus: evidence from bank branch deregulation

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  • Jith Jayaratne
  • Philip E. Strahan
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    Abstract

    This paper provides evidence that financial markets can directly affect economic growth by studying the relaxation of bank branch restrictions in the United States over the past 25 years. We find that the rates of real, per-capita growth in income and output increase significantly following intrastate branch reform. We also argue that the observed changes in growth reflect causality flowing from financial sector reform to improved growth performance. This argument is supported by evidence from the process of branching deregulation, from the timing of such policy changes, and from bank lending following branch reform. Moreover, the particular financial sector policy experiment studied here leads to faster growth by improving the quality of bank lending.

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    Bibliographic Info

    Paper provided by Federal Reserve Bank of New York in its series Research Paper with number 9513.

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    Date of creation: 1995
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    Handle: RePEc:fip:fednrp:9513

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    Keywords: Banking law ; Branch banks ; Bank supervision;

    References

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    1. Paul M Romer, 1999. "Increasing Returns and Long-Run Growth," Levine's Working Paper Archive 2232, David K. Levine.
    2. Alexander Galetovic, 1994. "Finance and growth: a synthesis and interpretation of the evidence," International Finance Discussion Papers 477, Board of Governors of the Federal Reserve System (U.S.).
    3. Ross Levine, 1990. "Financial structure and economic development," International Finance Discussion Papers 381, Board of Governors of the Federal Reserve System (U.S.).
    4. Pablo Emilio Guidotti & Jose De Gregorio, 1992. "Financial Development and Economic Growth," IMF Working Papers 92/101, International Monetary Fund.
    5. King, Robert G. & Levine, Ross, 1993. "Finance and growth : Schumpeter might be right," Policy Research Working Paper Series 1083, The World Bank.
    6. King, Robert G. & Levine, Ross, 1993. "Finance and growth : Schumpeter might be right," Policy Research Working Paper Series 1083, The World Bank.
    7. Levine, Ross & Renelt, David, 1991. "A sensitivity analysis of cross-country growth regressions," Policy Research Working Paper Series 609, The World Bank.
    8. Bencivenga, V.R. & Smith, B.D., 1988. "Financial Intermediation And Endogenous Growth," RCER Working Papers 124, University of Rochester - Center for Economic Research (RCER).
    9. Jappelli, Tullio & Pagano, Marco, 1994. "Saving, Growth, and Liquidity Constraints," The Quarterly Journal of Economics, MIT Press, vol. 109(1), pages 83-109, February.
    10. Greenwood, J. & Jovanovic, B., 1988. "Financial Development, Growth, And The Distribution Of Income," RCER Working Papers 131, University of Rochester - Center for Economic Research (RCER).
    11. Susan McLaughlin, 1995. "The impact of interstate banking and branching reform: evidence from the states," Current Issues in Economics and Finance, Federal Reserve Bank of New York, vol. 1(May).
    12. Paul S. Calem, 1994. "The impact of geographic deregulation on small banks," Business Review, Federal Reserve Bank of Philadelphia, issue Nov, pages 17-31.
    13. Allen Berger & Timothy Hannan, 1994. "The Efficiency Cost of Market Power in the Banking Industry: A Test of the 'Quiet Life' and Related Hypotheses," Center for Financial Institutions Working Papers 94-29, Wharton School Center for Financial Institutions, University of Pennsylvania.
    14. White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, vol. 48(4), pages 817-38, May.
    15. King, Robert G. & Levine, Ross, 1993. "Finance, entrepreneurship and growth: Theory and evidence," Journal of Monetary Economics, Elsevier, vol. 32(3), pages 513-542, December.
    16. Lucas, Robert Jr., 1988. "On the mechanics of economic development," Journal of Monetary Economics, Elsevier, vol. 22(1), pages 3-42, July.
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    Cited by:
    1. Beck, T.H.L., 2008. "Resolution of failed banks by deposit insurers: Cross-country evidence," Open Access publications from Tilburg University urn:nbn:nl:ui:12-3508404, Tilburg University.
    2. Laeven, Luc & Klingebiel, Daniela & Kroszner, Randy, 2002. "Financial crises, financial dependence, and industry growth," Policy Research Working Paper Series 2855, The World Bank.
    3. Kroszner, Randall S. & Laeven, Luc & Klingebiel, Daniela, 2007. "Banking crises, financial dependence, and growth," Journal of Financial Economics, Elsevier, vol. 84(1), pages 187-228, April.
    4. Dalila NICET-CHENAF (GREThA, CNRS, UMR 5113), 2012. "Model of Financial Development: A cluster analysis," Cahiers du GREThA 2012-01, Groupe de Recherche en Economie Théorique et Appliquée.

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