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Financial development and growth in European regions

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  • Paola Rossi

    (Banca d'Italia)

  • Diego Scalise

Abstract

In this paper we study the relationship between financial development and economic growth across European regions, exploiting the within-country variability of our data. First, we collect a number of indicators to capture the financial structure for each of the 110 EU27 regions. Then, the multiplicity of indicators (the number of bank branches, the presence of bank headquarters, the value added by the financial sector and the presence of a stock exchange) is decreased through a principal component analysis to show summary measures capturing the capillarity of bank branches and the agglomeration and complexity of the financial industry at large. In order to establish a causal nexus, we control for country fixed effects and we instrument financial variables. We use two instruments derived from the historical religious affiliations across European regions: the presence of Protestant communities in the 16th century (the Peace of Augsburg in 1555 allocated each region within the Holy Roman Empire to a different faith according the Prince’s religion) and the presence of Jewish communities in the 18th century. Our estimates point to a positive nexus between financial development and economic growth, showing that what matters most is the presence of a complex and diversified financial sector rather than the capillarity of bank branches.

Suggested Citation

  • Paola Rossi & Diego Scalise, 2019. "Financial development and growth in European regions," Temi di discussione (Economic working papers) 1246, Bank of Italy, Economic Research and International Relations Area.
    • Handle: RePEc:bdi:wptemi:td_1246_19
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    More about this item

    Keywords

    growth; financial development; European Regions;
    All these keywords.

    JEL classification:

    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • R11 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - Regional Economic Activity: Growth, Development, Environmental Issues, and Changes

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