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Finance for Growth: Does a Balanced Financial Structure Matter?

Author

Listed:
  • Alicia Garcia-Herrero
  • Lucia Cuadro-Saez

Abstract

In this paper we explore empirically a long-standing question in the literature on finance for growth, namely whether the financial structure in terms of the size of the banking system relative to the capital markets matters for economic growth. We build upon the existing literature by constructing a new measure of the balancedness of the financial structure which is broader, as it includes the domestic bond market as well as external sources of financing. It is also bounded and more linear than existing ones. We find that a more balanced financial structure in terms of the size of banks relative to the capital markets is associated with higher economic growth. Such finding points to banks and capital markets being more of a complement than a substitute. This is in line with Greenspan s idea of one market serving as spare wheel of the other.

Suggested Citation

  • Alicia Garcia-Herrero & Lucia Cuadro-Saez, 2005. "Finance for Growth: Does a Balanced Financial Structure Matter?," Working Papers 0503, BBVA Bank, Economic Research Department.
    • Handle: RePEc:bbv:wpaper:0503
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    Cited by:

    1. is not listed on IDEAS
    2. Moayedi, Vafa & Aminfard, Matin, 2011. "The Impact of Policy Shocks on Financial Structure: Empirical Results from Japan," MPRA Paper 39185, University Library of Munich, Germany.
    3. Luca Giordano & Claudia Guagliano, 2016. "The Impact of Financial Architecture on Technical Innovation," Applied Economics and Finance, Redfame publishing, vol. 3(3), pages 263-287, August.
    4. repec:pra:mprapa:38783 is not listed on IDEAS
    5. Ichiro Iwasaki & Shigeki Ono, 2024. "Economic development and the finance–growth nexus: a meta-analytic approach," Applied Economics, Taylor & Francis Journals, vol. 56(57), pages 8021-8038, December.

    More about this item

    JEL classification:

    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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