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Essay on Finance-Growth Nexus

Author

Listed:
  • Željka Asanović

    (Central Bank of Montenegro, Podgorica, Montenegro)

Abstract

There is a long tradition in literature that banks can play a special role in the propagation of economic fluctuations. Theory suggests many channels through which financial system affects, and is affected by, economic growth. One of the most important empirical studies on this topic shows a strong positive relation between financial development and economic growth. However, the hypothesis that credit expansion is the main development instrument was challenged in the Asian crisis in the second half of the 1990s, and then even more strongly in the crisis after 2008 which was followed by almost a decade of economic stagnation. Development of the banking sector in Southeast European countries in the pre-crisis period was characterized by relatively high credit growth rates and, consequently, with an increase of the credit-to-GDP ratio. Some authors argue that the marginal effect of financial depth on economic growth becomes negative when credit to the private sector reaches about 100% of GDP. Taking into account relatively low level of credit-to-GDP ratio, we may assume that there is still enough room for finance to contribute to economic growth in Southeast European countries.

Suggested Citation

  • Željka Asanović, 2020. "Essay on Finance-Growth Nexus," Journal of Central Banking Theory and Practice, Central bank of Montenegro, vol. 9(1), pages 97-109.
  • Handle: RePEc:cbk:journl:v:9:y:2020:i:1:p:97-109
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    File URL: http://www.cbcg.me/repec/cbk/journl/vol9no1-6.pdf
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    Citations

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    Cited by:

    1. Elena Deryugina & Maria Guseva & Alexey Ponomarenko, 2022. "The Credit Cycle and Measurement of the Natural Rate of Interest," Journal of Central Banking Theory and Practice, Central bank of Montenegro, vol. 11(1), pages 87-104.
    2. A. Dada, Matthew & M. A.Posu, Sunday & N.Raheem, Abiodun & D. Owoeye, Segun & A.Oguntegbe, Abraham, 2021. "Commercial Bank Credit Flow And Economic Growth In Nigeria," Ilorin Journal of Business and Social Sciences, Faculty of Social Sciences, University of Ilorin, vol. 23(2), pages 102-121, October.
    3. Amjad Taha & Mucahit Aydin & Taiwo Temitope Lasisi & Festus Victor Bekun & Narayan Sethi, 2023. "Toward a sustainable growth path in Arab economies: an extension of classical growth model," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 9(1), pages 1-24, December.
    4. Bofinger, Peter & Geißendörfer, Lisa & Haas, Thomas & Mayer, Fabian, 2023. "Credit as an instrument for growth: A monetary explanation of the Chinese growth story," W.E.P. - Würzburg Economic Papers 107, University of Würzburg, Department of Economics.
    5. Milutin Ješić & Miomir Jakšić, 2020. "The Impact of Institutional Features on R&D in Business Enterprise Sector and Sustainable Growth," Journal of Central Banking Theory and Practice, Central bank of Montenegro, vol. 9(3), pages 61-76.
    6. Bofinger, Peter & Geißendörfer, Lisa & Haas, Thomas & Mayer, Fabian, 2021. "Discovering the True Schumpeter - New Insights into the Finance and Growth Nexus," CEPR Discussion Papers 16851, C.E.P.R. Discussion Papers.
    7. Diptes C. P. Bhimjee, 2022. "Adaptive Early Warning Systems: An Axiomatic Approach," Journal of Central Banking Theory and Practice, Central bank of Montenegro, vol. 11(2), pages 145-164.

    More about this item

    Keywords

    finance-growth nexus; credit-to-GDP ratio; Southeast European countries.;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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