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Revaluing the Impact of Financial Development on Economic Growth and its Sources

  • Marcelo Dabós

    ()

    (University of Belgrano)

  • Tomás Williams

    ()

    (University of Belgrano)

This paper examines the empirical relationship between financial development and real per capita GDP growth, physical capital accumulation and total factor productivity growth. We use a panel data set of 78 countries over 35 years (1961-1995) using system GMM for dynamic panels. We correct the standards errors with the Windmeijer (2005) method and use a limited number of instruments. This new methodology improves over the one used in former papers on this subject by making possible to do better inferences and renders invalid former inferences in many papers. We consider four regions Africa, Asia, Europe and North America, and Latin America. We find that financial development in Latin America exhibits a positive effect at the 10% significant level over real per capita GDP growth. We find no evidence of an effect of our financial development measures over physical capital accumulation but there is a positive effect of financial development, measure by liquidity, over total factor productivity growth. Working with an updated database considering 45 years (1961-2005) we find that financial development is not a significant variable over economic growth.

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Article provided by Central Bank of Argentina, Economic Research Department in its journal Ensayos Económicos.

Volume (Year): 1 (2010)
Issue (Month): 60 (October - December)
Pages: 53-104

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Handle: RePEc:bcr:ensayo:v:1:y:2010:i:60:p:53-104
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  1. Neven Valev & Felix Rioja, 2002. "Finance and the Sources of Growth at Various Stages of Economic Development," International Center for Public Policy Working Paper Series, at AYSPS, GSU paper0217, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.
  2. Levine, Ross & Loayza, Norman & Beck, Thorsten, 1999. "Financial intermediation and growth : Causality and causes," Policy Research Working Paper Series 2059, The World Bank.
  3. Arellano, Manuel & Bover, Olympia, 1995. "Another look at the instrumental variable estimation of error-components models," Journal of Econometrics, Elsevier, vol. 68(1), pages 29-51, July.
  4. Windmeijer, Frank, 2005. "A finite sample correction for the variance of linear efficient two-step GMM estimators," Journal of Econometrics, Elsevier, vol. 126(1), pages 25-51, May.
  5. Richard Blundell & Steve Bond, 1995. "Initial conditions and moment restrictions in dynamic panel data models," IFS Working Papers W95/17, Institute for Fiscal Studies.
  6. Ross Levine, 2004. "Finance and Growth: Theory and Evidence," NBER Working Papers 10766, National Bureau of Economic Research, Inc.
  7. repec:ner:tilbur:urn:nbn:nl:ui:12-3125519 is not listed on IDEAS
  8. Lucas, Robert Jr., 1988. "On the mechanics of economic development," Journal of Monetary Economics, Elsevier, vol. 22(1), pages 3-42, July.
  9. Michael Clemens & Samuel Bazzi, 2009. "Blunt Instruments: On Establishing the Causes of Economic Growth," Working Papers 171, Center for Global Development.
  10. Daron Acemoglu & Simon Johnson & James A. Robinson, 2001. "The Colonial Origins of Comparative Development: An Empirical Investigation," American Economic Review, American Economic Association, vol. 91(5), pages 1369-1401, December.
  11. Rioja, Felix & Valev, Neven, 2004. "Does one size fit all?: a reexamination of the finance and growth relationship," Journal of Development Economics, Elsevier, vol. 74(2), pages 429-447, August.
  12. Beck , Thorsten & Demirguc-Kunt, Asli & Levine, Ross, 2009. "Financial institutions and markets across countries and over time - data and analysis," Policy Research Working Paper Series 4943, The World Bank.
  13. De Gregorio, Jose & Guidotti, Pablo E., 1995. "Financial development and economic growth," World Development, Elsevier, vol. 23(3), pages 433-448, March.
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