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Evolving Nature of Financial Intermediation and Economic Growth: Insights from a Bayesian Vector-Autoregression Analysis

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  • Ujjal K. Chatterjee

Abstract

We compute the growth of financial intermediary (FI) assets as an indicator of liquidity provided by intermediaries to the economy, as is done in the existing literature, and analyze its impact on the economy. We find that shocks to aggregate FI assets have a significant impact on U.S. real GDP and other macroeconomic indicators. Furthermore, shocks to assets of individual FIs also impact economic growth. However, our sub-sample analysis reveals notable shifts in the nature of financial intermediation- i) an increasing importance of market-based intermediaries, such as securities brokers and dealers, while the relationship between banks and the overall economy has diminished; ii) mutual funds demonstrate a greater impact compared to pension funds, underscoring their relative significance in driving economic outcomes in recent years; iii) insurance companies and shadow banks exhibit consistent significance across the sub-sample periods. These results suggest adopting a holistic approach to policymaking that considers various FIs, enhancing regulation and oversight of systemically important non-bank financial institutions, and monitoring of large insurers to mitigate the risk of financial instability.

Suggested Citation

  • Ujjal K. Chatterjee, 2023. "Evolving Nature of Financial Intermediation and Economic Growth: Insights from a Bayesian Vector-Autoregression Analysis," International Journal of Economics and Finance, Canadian Center of Science and Education, vol. 15(8), pages 1-1, August.
    • Handle: RePEc:ibn:ijefaa:v:15:y:2023:i:8:p:1
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    References listed on IDEAS

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    1. Anil K. Kashyap & Raghuram Rajan & Jeremy C. Stein, 2002. "Banks as Liquidity Providers: An Explanation for the Coexistence of Lending and Deposit‐taking," Journal of Finance, American Finance Association, vol. 57(1), pages 33-73, February.
    2. Valerie R. Bencivenga & Bruce D. Smith, 1991. "Financial Intermediation and Endogenous Growth," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 58(2), pages 195-209.
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    More about this item

    JEL classification:

    • R00 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General - - - General
    • Z0 - Other Special Topics - - General

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