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The econometrics of finance and growth

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  • Beck, Thorsten

Abstract

This paper reviews different econometric methodologies to assess the relationship between financial development and growth. It illustrates the identification problem, which is at the center of the finance and growth literature, using the example of a simple Ordinary Least Squares estimation. It discusses cross-sectional and panel instrumental variable approaches to overcome the identification problem. It presents the time-series approach, which focuses on the forecast capacity of financial development for future growth rates, and differences-in-differences techniques that try to overcome the identification problem by assessing the differential effect of financial sector development across states with different policies or across industries with different needs for external finance. Finally, it discusses firm-level and household approaches that allow analysts to dig deeper into the channels and mechanisms through which financial development enhances growth and welfare, but pose their own methodological challenges.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 4608.

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Date of creation: 01 Apr 2008
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Handle: RePEc:wbk:wbrwps:4608

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Keywords: Access to Finance; Achieving Shared Growth; Economic Theory&Research; Debt Markets; Statistical&Mathematical Sciences;

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References

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Cited by:
  1. Ari Aisen & Francisco José Veiga, 2010. "How does political instability affect economic growth?," Working Papers Central Bank of Chile 568, Central Bank of Chile.
  2. Bertay, Ata Can & Demirguc-Kunt, Asli & Huizinga, Harry, 2012. "Bank ownership and credit over the business cycle : is lending by state banks less procyclical?," Policy Research Working Paper Series 6110, The World Bank.
  3. Wolde-Rufael, Yemane, 2009. "Re-examining the financial development and economic growth nexus in Kenya," Economic Modelling, Elsevier, vol. 26(6), pages 1140-1146, November.
  4. Kendall, Jake, 2012. "Local financial development and growth," Journal of Banking & Finance, Elsevier, vol. 36(5), pages 1548-1562.
  5. Alex Trew, 2008. "Infrastructure Finance and Industrial Takeoff in the United Kingdom," CDMA Working Paper Series 200809, Centre for Dynamic Macroeconomic Analysis.

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