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Financial Intermediation and Growth: Causality and Causes

In: Banking, Financial Integration, and International Crises

  • Ross Levine

    (Brown University)

  • Norman Loayza

    (Banco Mundial)

  • Thorsten Beck

    (Universiteit van Tilburg)

The authors evaluate: a) whether the level of development of financial intermediaries exerts a casual influence on economic growth; and b) whether cross-country differences in legal and accounting systems (such as creditor rights, contract enforcement, and accounting standards) explain differences in the level of financial development. Using both traditional cross-section, instrumental-variable procedures and recent dynamic panel techniques, they find that development of financial intermediaries exerts a large causal impact on growth. The data also show that cross-country differences in legal and accounting systems help determine differences in financial development. Together, these findings suggest that legal and accounting reform that strengthens creditor rights, contract enforcement, and accounting practices boosts financial development and accelerates economic growth.

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This chapter was published in: Leonardo Hernández & Klaus Schmidt-Hebbel & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Series Editor) (ed.) Banking, Financial Integration, and International Crises, , chapter 2, pages 031-084, 2002.
This item is provided by Central Bank of Chile in its series Central Banking, Analysis, and Economic Policies Book Series with number v03c02pp031-084.
Handle: RePEc:chb:bcchsb:v03c02pp031-084
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