Has Financial Deepening Done More Harm Than Good?

Looking back at half a century of financial expansion together with a host of financial crises, one can wonder if financial deepening has done more harm than good? No straight answer has emerged. The finance-growth literature and the banking crisis literature have left many researchers with conflicting and contradictory findings. Undoubtedly, there are both pros and cons to financial development, giving support to investigating the prevailing outcome of financial deepening over time. The present paper thereby contributes to analyzing the finance-growth nexus by providing new estimates supporting an overall damaging influence of financial deepening on economic growth. The evidence suggests that the negative influence of financial depth has stronger ties in high-income countries, with possibly growth-enhancing effects at the early stages of development. These estimates are robust to various time coverage, several estimators, two datasets, and an array of empirical exercises.