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Financial Development, Financial Fragility, and Growth

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  • Norman Loayza
  • Mr. Romain Ranciere

Abstract

This paper studies the apparent contradictions between two strands of the literature on the effects of financial intermediation on economic activity. On the one hand, the empirical growth literature finds a positive effect of financial depth as measured by, for instance, private domestic credit and liquid liabilities. On the other hand, the banking and currency crisis literature finds that monetary aggregates, such as domestic credit, are among the best predictors of crises and their related economic downturns. This paper accounts for these contrasting effects based on the distinction between the short- and long-run effects of financial intermediation.

Suggested Citation

  • Norman Loayza & Mr. Romain Ranciere, 2005. "Financial Development, Financial Fragility, and Growth," IMF Working Papers 2005/170, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:2005/170
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    More about this item

    Keywords

    WP; economic growth; short-run coefficient; regression equation; growth rate; Growth empirics; banking crisis; pooled mean group estimation; error correction coefficient; PMG estimator; error-correction coefficient; estimation result; Systemic crises; Banking crises; Financial sector development; Production growth;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models

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