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Connection between Financial Sector and Economic Growth at High Levels of Financial Development

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  • Anton Gerunov

Abstract

Research on the finance-growth nexus over the last two decades has established a positive and stable link between financial development and economic growth, whereby the financial system supports the real economy through allocation of capital, risk management and productive innovation. On the other hand we should also heed the possibility of decreasing marginal returns due to large debt expositions. This article tests whether the positive effect of finance is observable at high levels of financial development. Data on the 27 member states of the European Union over a period of 12 years is empirically tested using panel regressions. Results show that overly extended financial systems exhibit decreasing returns to scale and can even exert a small but statistically significant negative effect on grow?h. The benevolent effects of financial development overshadow potential risks but financial systems nevertheless need to be subject to judicious regulation.

Suggested Citation

  • Anton Gerunov, 2014. "Connection between Financial Sector and Economic Growth at High Levels of Financial Development," Economic Studies journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 2, pages 39-68.
    • Handle: RePEc:bas:econst:y:2014:i:2:p:39-68
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    References listed on IDEAS

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    2. Mariya Neycheva & Ivan Neychev, 2020. "Overeducation and Economic Growth: Theoretical Background and Empirical Findings for the Region of Central and Eastern Europe," Economic Studies journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 5, pages 124-142.

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    More about this item

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

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