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Episodes of Financial Deepening: Credit Booms or Growth Generators?

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  • Peter L. Rousseau
  • Paul Wachtel

Abstract

One strand of the economics literature addresses financial deepening as a precursor to economic growth. Another views it as a cause of financial crises. We examine historical data for 17 economies from 1870 to 1929 to distinguish episodes of growth induced by financial deepening from crises induced by credit booms. Cross-country panel regressions with five-year averages indicate that deepening episodes, defined as increases of more than thirty percent (and alternatively more than twenty percentage points) in the ratio of M2 to GDP over a ten year period, significantly enhanced the standard finance-growth dynamic, while deepening associated with financial crises sharply hindered it. We then describe some specific episodes of financial deepening in our sample.
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  • Peter L. Rousseau & Paul Wachtel, 2015. "Episodes of Financial Deepening: Credit Booms or Growth Generators?," Working Papers 15-09, New York University, Leonard N. Stern School of Business, Department of Economics.
    • Handle: RePEc:ste:nystbu:15-09
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    Cited by:

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    3. Emmanuel Carré & Guillaume L’Œillet, 2017. "Une revue de la littérature récente sur le nexus finance-croissance après la crise : apports, limites et pistes de recherche," Revue d'économie financière, Association d'économie financière, vol. 0(3), pages 271-290.
    4. Paul Wachtel, 2018. "Credit Deepening: Precursor to Growth or Crisis?," Comparative Economic Studies, Palgrave Macmillan;Association for Comparative Economic Studies, vol. 60(1), pages 34-43, March.
    5. Björn Richter & Moritz Schularick & Paul Wachtel, 2021. "When to Lean against the Wind," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 53(1), pages 5-39, February.
    6. Anastasios Evgenidis & Anastasios G. Malliaris, 2022. "Monetary policy, financial shocks and economic activity," Review of Quantitative Finance and Accounting, Springer, vol. 59(2), pages 429-456, August.
    7. Thornton, John & Vasilakis, Chrysovalantis, 2023. "Bank regulations and surges and stops in credit: Panel evidence," Journal of Financial Stability, Elsevier, vol. 67(C).
    8. Agne Setikiene & Mindaugas Butkus, 2021. "The Heterogeneous Impact of Financialisation on Economic Growth in the Long Run," JRFM, MDPI, vol. 14(5), pages 1-30, May.
    9. Emmanuel Carré & Guillaume L’œillet, 2018. "The Literature on the Finance–Growth Nexus in the Aftermath of the Financial Crisis: A Review," Comparative Economic Studies, Palgrave Macmillan;Association for Comparative Economic Studies, vol. 60(1), pages 161-180, March.
    10. Miguel Angel Saldarriaga, 2017. "Credit Booms in Commodity Exporters," Working Papers 98, Peruvian Economic Association.

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    More about this item

    JEL classification:

    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • N1 - Economic History - - Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations

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