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Finance and growth in a bank-based economy: is it quantity or quality that matters?

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Author Info
Koetter, Michael
Wedow, Michael

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Abstract

With this paper we seek to contribute to the literature on the relation between finance and growth. We argue that most studies in the field fail to measure the quality of financial intermediation but rather resort to using proxies on the size of financial systems. Moreover, cross-country comparisons suffer from the disadvantage that systematic differences between markedly different economies may drive the result that finance matters. To circumvent these two problems we examine the importance of the quality of banks' financial intermediation in the regions of one economy only : Germany. To approximate the quality of financial intermediation we use cost effciency estimates derived with stochastic frontier analysis. We find that the quantity of supplied credit is indeed insignificant when a measure of intermediation quality is included. In turn, the efficiency of intermediation is robust, also after excluding banks likely to operate in multiple regions and distinguishing between different banking pillars active in Germany.

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Publisher Info
Paper provided by Deutsche Bundesbank, Research Centre in its series Discussion Paper Series 2: Banking and Financial Studies with number 2006,02.

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Date of creation: 2005
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Handle: RePEc:zbw:bubdp2:4358

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Related research
Keywords: Finance-growth nexus; financial intermediation; regional growth;

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Find related papers by JEL classification:
R11 - Urban, Rural, and Regional Economics - - General Regional Economics - - - Analysis of Growth, Development, and Changes
G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Mortgages
O4 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity
G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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References listed on IDEAS
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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. Soedarmono, Wahyoe & Augier, Laurent, 2009. "Threshold Effect and Financial Intermediation in Economic Development," MPRA Paper 14905, University Library of Munich, Germany. [Downloadable!]
  2. Angelo Zago & Francesco Aiello & Camilla Mastromarco, 2008. "Be productive or face decline. On the sources and determinants of output growth in Italian manufacturing firms," Working Papers 46, Università di Verona, Dipartimento di Scienze economiche. [Downloadable!]
  3. Christian Schröder, 2009. "Financial System and Innovations-Determinants of Early Stage Venture Capital in Europe," Schumpeter Discussion Papers sdp09004, Universitätsbibliothek Wuppertal, University Library. [Downloadable!]
  4. Ismail, Abdul Ghafar & Tohirin, Achmad, 2009. "Finance and Growth: The Role of Islamic Contracts," MPRA Paper 13744, University Library of Munich, Germany. [Downloadable!]
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