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The Evolution of the Finance Growth Nexus

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  • Paul Wachtel

    () (Stern School of Business, New York University, 44 West 4th Street, New York, NY 10012, USA.)

Abstract

The role of the financial sector in economic growth received scant attention from economists until very recently. An explosion of research in the last 20 years has firmly entrenched the finance growth nexus in the canon of economic beliefs. This paper suggests that the literature might have over emphasised the strength of the nexus that is much more nuanced than often suggested. The most commonly used measure of financial sector development, financial depth, is difficult to interpret because it can be a reflection of economy wide leverage as well as the quality and quantity of intermediation. Our examination of experience with financial deepening and of other measures of financial activity such as value added does not suggest that finance is unimportant. Instead, it shows how difficult it is to measure financial sector activity adequately.

Suggested Citation

  • Paul Wachtel, 2011. "The Evolution of the Finance Growth Nexus," Comparative Economic Studies, Palgrave Macmillan;Association for Comparative Economic Studies, vol. 53(3), pages 475-488, September.
  • Handle: RePEc:pal:compes:v:53:y:2011:i:3:p:475-488
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    References listed on IDEAS

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    1. Peter L. Rousseau & Paul Wachtel, 2011. "What Is Happening To The Impact Of Financial Deepening On Economic Growth?," Economic Inquiry, Western Economic Association International, vol. 49(1), pages 276-288, January.
    2. Robert G. King & Ross Levine, 1993. "Finance and Growth: Schumpeter Might Be Right," The Quarterly Journal of Economics, Oxford University Press, vol. 108(3), pages 717-737.
    3. Ross Levine, 1997. "Financial Development and Economic Growth: Views and Agenda," Journal of Economic Literature, American Economic Association, vol. 35(2), pages 688-726, June.
    4. Martin Neil Baily & Robert J. Gordon, 1988. "The Productivity Slowdown, Measurement Issues, and the Explosion of Computer Power," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 19(2), pages 347-432.
    5. Robert J. Barro, 1991. "Economic Growth in a Cross Section of Countries," The Quarterly Journal of Economics, Oxford University Press, vol. 106(2), pages 407-443.
    6. John Page, 1994. "The East Asian Miracle: Four Lessons for Development Policy," NBER Chapters,in: NBER Macroeconomics Annual 1994, Volume 9, pages 219-282 National Bureau of Economic Research, Inc.
    7. Wachtel, Paul, 2001. "Growth and Finance: What Do We Know and How Do We Know It?," International Finance, Wiley Blackwell, vol. 4(3), pages 335-362, Winter.
    8. Rousseau, Peter L & Wachtel, Paul, 1998. "Financial Intermediation and Economic Performance: Historical Evidence from Five Industrialized Countries," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 30(4), pages 657-678, November.
    9. Carmen M. Reinhart & Vincent Reinhart, 2010. "After the fall," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 17-60.
    10. Kraft, Evan & Jankov, Ljubinko, 2005. "Does speed kill? Lending booms and their consequences in Croatia," Journal of Banking & Finance, Elsevier, vol. 29(1), pages 105-121, January.
    11. Steven Radelet & Jeffrey D. Sachs, 1998. "The East Asian Financial Crisis: Diagnosis, Remedies, Prospects," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 29(1), pages 1-90.
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    Cited by:

    1. Hasan, Iftekhar & Song, Liang & Wachtel, Paul, 2014. "Institutional development and stock price synchronicity: Evidence from China," Journal of Comparative Economics, Elsevier, vol. 42(1), pages 92-108.
    2. Dirk Bezemer & Maria Grydaki & Lu Zhang, 2016. "More Mortgages, Lower Growth?," Economic Inquiry, Western Economic Association International, vol. 54(1), pages 652-674, January.
    3. Emmanuel Carré & Guillaume L’Œillet, 2017. "Une revue de la littérature récente sur le nexus finance-croissance après la crise : apports, limites et pistes de recherche," Revue d'économie financière, Association d'économie financière, vol. 0(3), pages 271-290.
    4. Peter Haiss & Hannes Juvan & Bernhard Mahlberg, 2016. "The Impact of Financial Crises on the Finance–Growth Relationship: A European Perspective," Economic Notes, Banca Monte dei Paschi di Siena SpA, vol. 45(3), pages 423-444, November.
    5. Thorsten Beck, 2013. "Finance, growth and fragility: the role of government," International Journal of Banking, Accounting and Finance, Inderscience Enterprises Ltd, vol. 5(1/2), pages 49-77.
    6. repec:pal:compes:v:60:y:2018:i:1:d:10.1057_s41294-018-0056-6 is not listed on IDEAS
    7. James R. Brown & Gustav Martinsson & Bruce C. Petersen, 2013. "Law, Stock Markets, and Innovation," Journal of Finance, American Finance Association, vol. 68(4), pages 1517-1549, August.

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