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The causal effects of the darker side of financial development

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  • Rachel Cho
  • Rodolphe Desbordes
  • Markus Eberhardt

Abstract

We study the causal implications of financial deepening for economic development and financial crises, adopting a heterogeneous difference-in-difference framework. Using cross-country data for the past six decades we demonstrate that very high levels of finance, proxied by credit/GDP, are neither associated with lower long-run growth nor with higher short-run propensity of banking crises due to ‘credit booms gone bust’ cycles or unfettered capital inflows. When we investigate ‘too much finance’ at intermediate levels of credit/GDP we find increased crisis propensity due to capital inflows and commodity price movements, but, again, no detrimental long-run growth effects for these (emerging) economies.

Suggested Citation

  • Rachel Cho & Rodolphe Desbordes & Markus Eberhardt, 2022. "The causal effects of the darker side of financial development," Discussion Papers 2022-04, University of Nottingham, GEP.
    • Handle: RePEc:not:notgep:2022-04
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    Keywords

    financial development; economic growth; financial crises; difference-in-difference; interactive fixed effects; heterogeneous treatment effects;
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