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Finance for Growth. Does a Balanced Financial Structure Matter?

  • Lucía Cuadro-Sáez
  • Alicia García-Herrero

In this paper we explore empirically a long-standing question in the literature on finance for growth, namely whether the financial structure ?in terms of the size of the banking system relative to the capital markets? matters for economic growth. We build upon the existing literature by constructing a new measure of the ?balancedness? of the financial structure which is broader, as it includes the domestic bond market as well as external sources of financing. It is also bounded and more linear than existing ones. We find that a more balanced financial structure ?in terms of the size of banks relative to the capital markets? is associated with higher economic growth. Such finding points to banks and capital markets being more of a complement than a substitute. This is in line with Greenspan?s idea of one market serving as ?spare wheel? of the other. JEL Codes: O16, G15, G21

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Article provided by Presses de Sciences-Po in its journal Revue économique.

Volume (Year): 59 (2008)
Issue (Month): 6 ()
Pages: 1075-1096

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Handle: RePEc:cai:recosp:reco_596_1075
Contact details of provider: Web page: http://www.cairn.info/revue-economique.htm

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  1. Ross Levine, 2002. "Bank-Based or Market-Based Financial Systems: Which is Better?," William Davidson Institute Working Papers Series 442, William Davidson Institute at the University of Michigan.
  2. Rafael LaPorta & Florencio Lopez-de-Silanes & Andrei Shleifer & Robert Vishny, . "Investor Protection and Corporate Governance," Working Paper 19455, Harvard University OpenScholar.
  3. King, Robert G & Levine, Ross, 1993. "Finance and Growth: Schumpeter Might Be Right," The Quarterly Journal of Economics, MIT Press, vol. 108(3), pages 717-37, August.
  4. Ross Levine & Sara Zervos, . "Stock markets, banks and economic growth ," CERF Discussion Paper Series 95-11, Economics and Finance Section, School of Social Sciences, Brunel University.
  5. 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.
  6. Stiglitz, Joseph E, 1985. "Credit Markets and the Control of Capital," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 17(2), pages 133-52, May.
  7. O. Emre Ergungor, 2003. "Financial system structure and economic development: structure matters," Working Paper 0305, Federal Reserve Bank of Cleveland.
  8. Levine, Ross & Loayza, Norman & Beck, Thorsten, 2000. "Financial intermediation and growth: Causality and causes," Journal of Monetary Economics, Elsevier, vol. 46(1), pages 31-77, August.
  9. Thorsten Beck & Asli Demirgüç-Kunt & Ross Levine, 2001. "Legal Theories of Financial Development," Oxford Review of Economic Policy, Oxford University Press, vol. 17(4), pages 483-501.
  10. Boot, Arnoud W A & Greenbaum, Stuart I & Thakor, Anjan V, 1993. "Reputation and Discretion in Financial Contracting," American Economic Review, American Economic Association, vol. 83(5), pages 1165-83, December.
  11. Levine, Ross, 1996. "Financial development and economic growth : views and agenda," Policy Research Working Paper Series 1678, The World Bank.
  12. repec:ner:tilbur:urn:nbn:nl:ui:12-3125516 is not listed on IDEAS
  13. Demirguc-Kunt, Asli & Levine, Ross, 1999. "Bank-based and market-based financial systems - cross-country comparisons," Policy Research Working Paper Series 2143, The World Bank.
  14. repec:ner:tilbur:urn:nbn:nl:ui:12-3125519 is not listed on IDEAS
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