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Local financial development and growth

  • Kendall, Jake

Using unique, district-level, economic growth data, I investigate the connection between banking sector development, human capital, and economic growth in Indian districts. Disaggregate data helps avoid many of the omitted variable problems that plague similar cross-country studies. The data show districts to be financially constrained by the lack of local banking sector development, and the relationship may be non-linear. For districts in the sample, moving from the 75th percentile of credit/net domestic product to the 25th percentile implies an average loss of 4% in growth over the 1990s decade. The data also shows that human capital deepening can reduce the financial constraint. In a district at the 25th literacy percentile, the implied growth loss due to a constrained banking sector is twice as large as in a district at the 75th literacy percentile. The results are robust to the inclusion of various controls and changes in specification.

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Article provided by Elsevier in its journal Journal of Banking & Finance.

Volume (Year): 36 (2012)
Issue (Month): 5 ()
Pages: 1548-1562

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Handle: RePEc:eee:jbfina:v:36:y:2012:i:5:p:1548-1562
DOI: 10.1016/j.jbankfin.2012.01.001
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