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Financial structure and macroeconomic performance over the short and long run

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  • Jose A. Lopez
  • Mark M. Spiegel

Abstract

We examine the relationship between indicators of financial development and economic performance for a cross-country panel over long and short periods. Our long-term results are consistent with much of the literature in that we find a positive relationship between financial development and economic growth. However, we fail to find a significant positive relationship after accounting for disparities in factor accumulation. These results therefore indicate that the primary channel for financial development to facilitate growth over the long run is through physical and human capital accumulation. We also identify a significant negative relationship between financial development and income volatility, suggesting that financial development does mitigate economic fluctuations in the long run. ; We then turn to short-run analysis, concentrating on the period immediately surrounding the 1997 Asian financial crisis. Unlike our long-term results, our short-term panel analysis fails to find a significant relationship financial development and economic performance during this period, both for a broad sample of countries and for a small sample of developing Asian nations. ; Taken as a whole, our analysis appears to support a relatively new idea in the literature that while financial development is beneficial over the long run, it may exacerbate short-term volatility in isolated episodes. One reason for this discrepancy may be that financial liberalizations are typically only partial, resulting in increased financial market distortions. We analyze the Korean experience in the period surrounding the Asian financial crisis and argue that this experience supports the idea of distortionary partial liberalization.

Suggested Citation

  • Jose A. Lopez & Mark M. Spiegel, 2002. "Financial structure and macroeconomic performance over the short and long run," Pacific Basin Working Paper Series 2002-05, Federal Reserve Bank of San Francisco.
  • Handle: RePEc:fip:fedfpb:2002-05
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    Cited by:

    1. Piyapas Tharavanij, 2007. "Capital Market, Frequency Of Recession, And Fraction Of Time The Economy In Recession," Monash Economics Working Papers 34-07, Monash University, Department of Economics.
    2. Piyapas Tharavanij, 2007. "Capital Market, Severity Of Business Cycle, And Probability Of An Economic Downturn," Monash Economics Working Papers 32-07, Monash University, Department of Economics.
    3. Tharavanij, Piyapas, 2007. "Capital Market and Business Cycle Volatility," MPRA Paper 4952, University Library of Munich, Germany.
    4. Huizinga, Harry & Zhu, Dantao, 2006. "Financial Structure and Macroeconomic Volatility: Theory and Evidence," CEPR Discussion Papers 5697, C.E.P.R. Discussion Papers.
    5. repec:eee:phsmap:v:484:y:2017:i:c:p:66-81 is not listed on IDEAS
    6. Mallick, Debdulal, 2014. "Financial Development, Shocks, And Growth Volatility," Macroeconomic Dynamics, Cambridge University Press, vol. 18(03), pages 651-688, April.
    7. Ruiz-Porras, Antonio, 2006. "Financial systems and banking crises: An assessment," MPRA Paper 168, University Library of Munich, Germany.
    8. Tharavanij, Piyapas, 2007. "Capital Market, Severity of Business Cycle, and Probability of Economic Downturn," MPRA Paper 4953, University Library of Munich, Germany.

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    Keywords

    Banking structure ; Financial institutions;

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