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Do efficient banking sectors accelerate economic growth in transition countries?

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Author Info
Tuuli Koivu (Bank of Finland Institute for Economies in Transition)
Abstract

The relationship between financial sector and economic growth in transition countries has been largely ignored in the earlier empirical literature. In this paper, we analyse the finance-growth nexus using a fixed-effects panel model and unbalanced panel data from 25 transition countries during the period 1993-2000. We measure the qualitative development in the banking sectors using the margin between lending and deposit interest rates. Our second variable for the level of financial sector development is the amount of bank credit allocated to the private sector as a share of GDP. According to our results, the interest rate margin is significantly and negatively related to economic growth. This outcome is in line with theoretical models and has important policy implications. On the other hand, a rise in the amount of credit does not seem to accelerate economic growth. The main reasons behind this result could be the numerous banking crises the transition countries have experienced and the soft budget constraints that are still prevalent in many transition countries. Due to these specific characteristics the growth in credit has not always been sustainable and in some cases it may have led to a decline in growth rates.

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Paper provided by EconWPA in its series Macroeconomics with number 0212013.

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Length: 24 pages
Date of creation: 31 Dec 2002
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Handle: RePEc:wpa:wuwpma:0212013

Note: Type of Document - PDF; prepared on PC; pages: 24; figures: included
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Keywords: financial sector; transition economies; economic growth; panel data;

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E - Macroeconomics and Monetary Economics

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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  2. Thiel, M., 2001. "Finance and Economic Growth - a Review of Theory and the Available Evidence," European Economy - Economic Papers 158, Commission of the EC, Directorate-General for Economic and Financial Affairs (DG ECFIN).
  3. Berglöf, Erik & Roland, Gérard, 1995. "Bank Restructuring and Soft Budget Constraints in Financial Transition," CEPR Discussion Papers 1250, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  4. Pagano, Marco, 1993. "Financial markets and growth: An overview," European Economic Review, Elsevier, vol. 37(2-3), pages 613-622, April. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Vernikov , Andrei V., 2007. "Russia's banking sector transition: Where to?," BOFIT Discussion Papers 5/2007, Bank of Finland, Institute for Economies in Transition. [Downloadable!]
  2. Jaap Bos & Mindel van de Laar, 2004. "Explaining Foreign Direct Investment in Central and Eastern Europe: an Extended Gravity Approach," DNB Working Papers 008, Netherlands Central Bank, Research Department. [Downloadable!]
    Other versions:
  3. Gatti, Roberta & Love, Inessa, 2008. "Does access to credit improve productivity? Evidence from Bulgarian firms," CEPR Discussion Papers 6676, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  4. Vesna Babic- Hodovic & Eldin Mehic & Emir Agic, 2009. "Influence of Quantitative and Qualitative Factors of Banking Sector Development on Economic Growth in South East European Countries," Interdisciplinary Management Research, Faculty of Economics in Osijek, Croatia, vol. 5, pages 683-693. [Downloadable!]
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