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The Economic Effects of ‘Excessive’ Financial Deepening

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  • Rachel Cho
  • Rodolphe Desbordes
  • Markus Eberhardt

Abstract

We study the causal implications of high levels of financial deepening for economic development and banking crises in a panel of countries over the past seven decades. We adopt a factor‐augmented heterogeneous difference‐in‐differences estimator and find, in contrast to the existing literature, that very high levels of financial development do not lead to lower long‐term economic growth or a higher likelihood of banking crises associated with ‘credit booms gone bust’ cycles or excessive capital inflows. We submit this null result to a battery of robustness checks adopting alternative specifications, alternative aggregate data for households vs. firms, and carrying out theory‐driven heterogeneity analysis.

Suggested Citation

  • Rachel Cho & Rodolphe Desbordes & Markus Eberhardt, 2026. "The Economic Effects of ‘Excessive’ Financial Deepening," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 88(3), pages 458-472, June.
    • Handle: RePEc:bla:obuest:v:88:y:2026:i:3:p:458-472
    DOI: 10.1111/obes.70018
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