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Granularity in Banking and Growth: Does Financial Openness Matter?

  • Franziska Bremus
  • Claudia M. Buch

We explore the impact of large banks and of financial openness for aggregate growth. Large banks matter because of granular effects: if markets are very concentrated in terms of the size distribution of banks, idiosyncratic shocks at the bank-level do not cancel out in the aggregate but can affect macroeconomic outcomes. Financial openness may affect GDP growth in and of itself, and it may also influence concentration in banking and thus the impact of bank-specific shocks for the aggregate economy. To test these relationships, we use different measures of de jure and de facto financial openness in a linked micro-macro panel dataset. Our research has three main findings: First, bank-level shocks significantly impact on GDP. Second, financial openness lowers GDP growth. Third, granular effects tend to be stronger in financially closed economies.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 4356.

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Date of creation: 2013
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Handle: RePEc:ces:ceswps:_4356
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  1. Peter Henry, 2007. "Capital Account Liberalization: Theory, Evidence, and Speculation," Discussion Papers 07-004, Stanford Institute for Economic Policy Research.
  2. Alan M. Taylor, 2013. "The Great Leveraging," World Scientific Book Chapters, in: The Social Value of the Financial Sector Too Big to Fail or Just Too Big?, chapter 4, pages 33-65 World Scientific Publishing Co. Pte. Ltd..
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  9. Bruce E. Hansen, 1997. "Threshold effects in non-dynamic panels: Estimation, testing and inference," Boston College Working Papers in Economics 365, Boston College Department of Economics.
  10. Franziska Bremus & Claudia M. Buch & Katheryn N. Russ & Monika Schnitzer, 2013. "Big Banks and Macroeconomic Outcomes: Theory and Cross-Country Evidence of Granularity," Discussion Papers of DIW Berlin 1348, DIW Berlin, German Institute for Economic Research.
  11. Chinn, Menzie David & Ito, Hiro, 2005. "What Matters for Financial Development? Capital Controls, Institutions, and Interactions," Santa Cruz Center for International Economics, Working Paper Series qt5pv1j341, Center for International Economics, UC Santa Cruz.
  12. Peter Blair Henry, 2006. "Capital Account Liberalization: Theory, Evidence, and Speculation," NBER Working Papers 12698, National Bureau of Economic Research, Inc.
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  22. Bick, Alexander, 2010. "Threshold effects of inflation on economic growth in developing countries," Economics Letters, Elsevier, vol. 108(2), pages 126-129, August.
  23. Franziska Bremus, 2013. "Cross-Border Banking, Bank Market Structures and Market Power: Theory and Cross-Country Evidence," Discussion Papers of DIW Berlin 1344, DIW Berlin, German Institute for Economic Research.
  24. Mary Amiti & David E. Weinstein, 2013. "How Much do Bank Shocks Affect Investment? Evidence from Matched Bank-Firm Loan Data," NBER Working Papers 18890, National Bureau of Economic Research, Inc.
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