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The effect of financial development on economic growth: a meta-analysis

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  • Michiel Bijlsma
  • Clemens Kool
  • Marielle Non

Abstract

In this article, we contribute to the current debate on the sign and size of the finance–growth relation. To this purpose, we use a meta-analysis with 551 estimates from 68 empirical studies that take private credit to GDP as a measure for financial development. We distinguish between linear and logarithmic specifications. First, we find evidence of significantly positive publication bias in both the linear and log-linear specifications. It suggests the literature has exaggerated the size of the finance–growth effect in the past. Second, we find suggestive evidence that the logarithmic specification is superior to the linear specification. In the logarithmic specification when accounting for publication bias, a 10% increase in credit to the private sector increases economic growth with 0.09 percentage points. For the linear estimates, no significant effect of credit to the private sector on economic growth is found on average. Overall, the evidence points to a positive but decreasing effect of financial development on growth and supports the ‘too much’ finance hypothesis.

Suggested Citation

  • Michiel Bijlsma & Clemens Kool & Marielle Non, 2018. "The effect of financial development on economic growth: a meta-analysis," Applied Economics, Taylor & Francis Journals, vol. 50(57), pages 6128-6148, December.
  • Handle: RePEc:taf:applec:v:50:y:2018:i:57:p:6128-6148
    DOI: 10.1080/00036846.2018.1489503
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    Cited by:

    1. Jianhua Duan & Kuntal K. Das & Laura Meriluoto & W. Robert Reed, 2019. "Spillovers and Exports: A Meta-Analysis," Working Papers in Economics 19/03, University of Canterbury, Department of Economics and Finance.
    2. Jan Kakes & Rob Nijskens, 2018. "Size of the banking sector: implications for financial stability," DNB Occasional Studies 1606, Netherlands Central Bank, Research Department.

    More about this item

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • 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
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

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