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Is There an Optimum Level of Financial Activity?

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Abstract

This paper addresses the notion of an "optimum level of financial activity" that is contingent on a country's general level of development. Referring to threshold regressions and a bootstrap test for structural shift of the finance regressor in a growth equation, it is shown that countries gain less from a given level of financial activity, if the latter fails to keep up with or exceeds what would follow from a balanced expansion path. The paper contributes to the literature on the finance-growth nexus in providing empirical support for the notion of "balanced" financial development with a development specific optimum level of financial activity.

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Bibliographic Info

Paper provided by KOF Swiss Economic Institute, ETH Zurich in its series KOF Working papers with number 05-106.

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Length: 29 pages
Date of creation: Aug 2005
Date of revision:
Handle: RePEc:kof:wpskof:05-106

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Keywords: Optimum financial activity; Bayesian statistics; bootstrapping;

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