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Two faces of financial systems: Provision of services versus shock-smoothing

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  • Vinogradov, Dmitri
  • Makhlouf, Yousef

Abstract

Banks and financial markets contribute to economic growth directly – by providing information, liquidity and other services to investors and borrowers, and indirectly – by dampening the impact of exogenous shocks on growth. Do banks and markets perform equally well in both? Our panel of 44 developing and 29 developed countries in 1975–2017 demonstrates significance of only the service channel in advanced economies: they perform better if they are market-based. In less developed economies financial structure has no direct relevance for growth but offers shock-smoothing advantages through banks; market trading activity makes shocks absorbed faster and transmitted to the real sector quicker.

Suggested Citation

  • Vinogradov, Dmitri & Makhlouf, Yousef, 2021. "Two faces of financial systems: Provision of services versus shock-smoothing," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 75(C).
    • Handle: RePEc:eee:intfin:v:75:y:2021:i:c:s1042443121001645
    DOI: 10.1016/j.intfin.2021.101456
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    More about this item

    Keywords

    Financial structure; Bank-based; Market-based; Intertemporal smoothing; Exogenous shocks;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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