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What determines the finance-growth nexus? An endogenous growth model and empirical evidence

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  • Graff, Michael
  • Karmann, Alexander

Abstract

An endogenous growth model with a financial sector is formulated, and empirical analyses are conducted. The model exhibits structural shifts and breaks caused by institutional change, suggesting that a linear approach is inadequate. To address this point empirically, we fit data for 90 countries from 1960–2000 to a standard growth equation with a proxy for financial activity. Firstly, it is shown that a growth enhancing outcome of financial activity is contingent on a sound institutional framework. Then, we order the sample by control variables which follow from the model as potential causes of breaks in the adjustment process. Threshold regressions reveal non-linearity that is consistent with the model. Most importantly, we find signs for excessive financial activity. --

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Bibliographic Info

Paper provided by Dresden University of Technology, Faculty of Business and Economics, Department of Economics in its series Dresden Discussion Paper Series in Economics with number 15/03.

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Date of creation: 2003
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Handle: RePEc:zbw:tuddps:1503

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Related research

Keywords: Financial Development; Endogenous Growth; Institutions; Non-linearities;

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References

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  1. Ross Levine, 1997. "Financial Development and Economic Growth: Views and Agenda," Journal of Economic Literature, American Economic Association, vol. 35(2), pages 688-726, June.
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Cited by:
  1. Stati Statev, 2009. "The Interaction between the Banking System and the Real Economy (Part One: Theory and Methodology)," Economic Thought journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 7, pages 38-66.
  2. Michael Graff & Alexander Karmann, 2006. "What Determines the Finance-growth Nexus? Empirical Evidence for Threshold Models," Journal of Economics, Springer, Springer, vol. 87(2), pages 127-157, 03.
  3. Chen, K.C. & Wu, Lifan & Wen, Jian, 2013. "The relationship between finance and growth in China," Global Finance Journal, Elsevier, vol. 24(1), pages 1-12.
  4. Stati Statev, 2009. "The Interaction between the Banking System and the Real Economy (Part One: Theory and Methodology)," Economic Thought journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 3, pages 3-28.

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