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Finance-Growth Nexus and the P-bias: Evidence from OECD Countries


  • Franz R. Hahn


Recent studies provide new empirical evidence confirming that financial development is linked to economic growth in OECD countries. Using new dynamic panel regression techniques, these appraisals indicate that within the group of high-income countries stock market size as a measure of financial advancement contributes significantly to overall economic activity. Applying the same advanced techniques, this paper questions this conclusion by showing that the findings of these studies seem to be not only not robust with respect to adding new observations but also likely to be plagued by a severe price bias which belittles the information content of the used financial indicator (stock market capitalization). We provide evidence that anticipative price effects (i.e. expectations of future growth, reflected in current stock prices) may be driving the statistical relationship between stock market activities and economic growth in high-income countries to a much larger extent than recent analyses of the finance- growth link in OECD countries suggest. Copyright Banca Monte dei Paschi di Siena SpA, 2005

Suggested Citation

  • Franz R. Hahn, 2005. "Finance-Growth Nexus and the P-bias: Evidence from OECD Countries," Economic Notes, Banca Monte dei Paschi di Siena SpA, vol. 34(1), pages 113-126, February.
  • Handle: RePEc:bla:ecnote:v:34:y:2005:i:1:p:113-126

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    References listed on IDEAS

    1. Raghuram G. Rajan & Luigi Zingales, 2001. "Financial Systems, Industrial Structure, and Growth," Oxford Review of Economic Policy, Oxford University Press, vol. 17(4), pages 467-482.
    2. Andrea Bassanini & Stefano Scarpetta, 2001. "Does Human Capital Matter for Growth in OECD Countries?: Evidence from Pooled Mean-Group Estimates," OECD Economics Department Working Papers 282, OECD Publishing.
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    6. Andres, Javier & Hernando, Ignacio & Lopez-Salido, J. David, 2004. "The role of the financial system in the growth-inflation link: the OECD experience," European Journal of Political Economy, Elsevier, vol. 20(4), pages 941-961, November.
    7. Ross Levine & Norman Loayza & Thorsten Beck, 2002. "Financial Intermediation and Growth: Causality and Causes," Central Banking, Analysis, and Economic Policies Book Series,in: Leonardo Hernández & Klaus Schmidt-Hebbel & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Se (ed.), Banking, Financial Integration, and International Crises, edition 1, volume 3, chapter 2, pages 031-084 Central Bank of Chile.
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    10. Yongcheol Shin & Ron P Smith & Mohammad Hashem Pesaran, 1998. "Pooled Mean Group Estimation of Dynamic Heterogeneous Panels," ESE Discussion Papers 16, Edinburgh School of Economics, University of Edinburgh.
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    12. Pagano, Marco, 1993. "Financial markets and growth: An overview," European Economic Review, Elsevier, vol. 37(2-3), pages 613-622, April.
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    16. Franz R. Hahn, 2002. "The Finance-Growth Nexus Revisited. New Evidence from OECD Countries," WIFO Working Papers 176, WIFO.
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    Cited by:

    1. Franz R. Hahn, 2006. "Finance-Growth Linkage and Risk Diversification. Evidence from OECD Countries," WIFO Working Papers 281, WIFO.

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