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Non-linear finance-growth nexus

  • Ho-Chuan Huang
  • Shu-Chin Lin

This paper revisits the question of whether the finance-growth nexus varies with the stages of economic development. Using a novel threshold regression with the instrumental variables approach proposed by Caner and Hansen (2004) to the dataset used in Levine "et al." (2000) we detect overwhelming evidence in support of a positive linkage between financial development and economic growth, and this positive effect is larger in the low-income countries than in the high-income ones. The data also reveal that financial development tends to have stronger impacts on capital accumulation and productivity growth in the low-income countries than in the high-income ones. The findings are robust to alternative financial development measures and conditioning information sets. Copyright (c) 2009 The Authors. Journal compilation (c) 2009 The European Bank for Reconstruction and Development.

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File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.1468-0351.2009.00360.x
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Article provided by The European Bank for Reconstruction and Development in its journal Economics of Transition.

Volume (Year): 17 (2009)
Issue (Month): 3 (07)
Pages: 439-466

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Handle: RePEc:bla:etrans:v:17:y:2009:i:3:p:439-466
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  1. 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.
  2. Rafael La Porta & Florencio Lopez-de-Silane & Andrei Shleifer & Robert W. Vishny, 1996. "Law and Finance," NBER Working Papers 5661, National Bureau of Economic Research, Inc.
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  6. Ross Levine, 1998. "The legal environment, banks, and long-run economic growth," Proceedings, Federal Reserve Bank of Cleveland, issue Aug, pages 596-620.
  7. Daron Acemoglu & Fabrizio Zilibotti, 1994. "Was Prometheus unbound by chance? Risk, diversification and growth," Economics Working Papers 98, Department of Economics and Business, Universitat Pompeu Fabra.
  8. Deidda, Luca & Fattouh, Bassam, 2008. "Banks, financial markets and growth," Journal of Financial Intermediation, Elsevier, vol. 17(1), pages 6-36, January.
  9. Robert G. King & Ross Levine, 1993. "Finance and Growth: Schumpeter Might Be Right," The Quarterly Journal of Economics, Oxford University Press, vol. 108(3), pages 717-737.
  10. Greenwood, J. & Jovanovic, B., 1990. "Financial Development, Growth, And The Distribution Of Income," University of Western Ontario, The Centre for the Study of International Economic Relations Working Papers 9002, University of Western Ontario, The Centre for the Study of International Economic Relations.
  11. Calderon, Cesar & Liu, Lin, 2003. "The direction of causality between financial development and economic growth," Journal of Development Economics, Elsevier, vol. 72(1), pages 321-334, October.
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  15. Levine, Ross, 1999. "Law, Finance, and Economic Growth," Journal of Financial Intermediation, Elsevier, vol. 8(1-2), pages 8-35, January.
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  17. Lucas, Robert Jr., 1988. "On the mechanics of economic development," Journal of Monetary Economics, Elsevier, vol. 22(1), pages 3-42, July.
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  19. Levine, Ross & Zervos, Sara, 1998. "Stock Markets, Banks, and Economic Growth," American Economic Review, American Economic Association, vol. 88(3), pages 537-58, June.
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  22. Hansen, Bruce E, 1996. "Inference When a Nuisance Parameter Is Not Identified under the Null Hypothesis," Econometrica, Econometric Society, vol. 64(2), pages 413-30, March.
  23. John H. Boyd & Bruce D. Smith, 1995. "The evolution of debt and equity markets in economic development," Working Papers 542, Federal Reserve Bank of Minneapolis.
  24. Bruce E. Hansen, 2000. "Sample Splitting and Threshold Estimation," Econometrica, Econometric Society, vol. 68(3), pages 575-604, May.
  25. Caner, Mehmet & Hansen, Bruce E., 2004. "Instrumental Variable Estimation Of A Threshold Model," Econometric Theory, Cambridge University Press, vol. 20(05), pages 813-843, October.
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  27. McCaig, Brian & Stengos, Thanasis, 2005. "Financial intermediation and growth: Some robustness results," Economics Letters, Elsevier, vol. 88(3), pages 306-312, September.
  28. King, Robert G. & Levine, Ross, 1993. "Finance, entrepreneurship and growth: Theory and evidence," Journal of Monetary Economics, Elsevier, vol. 32(3), pages 513-542, December.
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