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The finance-growth nexus: evidence from bank branch deregulation

Listed author(s):
  • Jith Jayaratne
  • Philip E. Strahan
Registered author(s):

    This paper provides evidence that financial markets can directly affect economic growth by studying the relaxation of bank branch restrictions in the United States over the past 25 years. We find that the rates of real, per-capita growth in income and output increase significantly following intrastate branch reform. We also argue that the observed changes in growth reflect causality flowing from financial sector reform to improved growth performance. This argument is supported by evidence from the process of branching deregulation, from the timing of such policy changes, and from bank lending following branch reform. Moreover, the particular financial sector policy experiment studied here leads to faster growth by improving the quality of bank lending.

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    File URL: https://www.newyorkfed.org/medialibrary/media/research/staff_reports/research_papers/9513.html
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    File URL: https://www.newyorkfed.org/medialibrary/media/research/staff_reports/research_papers/9513.pdf
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    Paper provided by Federal Reserve Bank of New York in its series Research Paper with number 9513.

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    Date of creation: 1995
    Handle: RePEc:fip:fednrp:9513
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    1. Alexander Galetovic, 1994. "Finance and growth: a synthesis and interpretation of the evidence," International Finance Discussion Papers 477, Board of Governors of the Federal Reserve System (U.S.).
    2. Levine, Ross & Renelt, David, 1991. "A sensitivity analysis of cross-country growth regressions," Policy Research Working Paper Series 609, The World Bank.
    3. King, Robert G. & Levine, Ross, 1993. "Finance, entrepreneurship and growth: Theory and evidence," Journal of Monetary Economics, Elsevier, vol. 32(3), pages 513-542, December.
    4. Allen Berger & Timothy Hannan, 1994. "The Efficiency Cost of Market Power in the Banking Industry: A Test of the 'Quiet Life' and Related Hypotheses," Center for Financial Institutions Working Papers 94-29, Wharton School Center for Financial Institutions, University of Pennsylvania.
    5. Robert G. King & Ross Levine, 1993. "Finance and Growth: Schumpeter Might Be Right," The Quarterly Journal of Economics, Oxford University Press, vol. 108(3), pages 717-737.
    6. Lucas, Robert Jr., 1988. "On the mechanics of economic development," Journal of Monetary Economics, Elsevier, vol. 22(1), pages 3-42, July.
    7. Paul S. Calem, 1994. "The impact of geographic deregulation on small banks," Business Review, Federal Reserve Bank of Philadelphia, issue Nov, pages 17-31.
    8. Romer, Paul M, 1986. "Increasing Returns and Long-run Growth," Journal of Political Economy, University of Chicago Press, vol. 94(5), pages 1002-1037, October.
    9. De Gregorio, Jose & Guidotti, Pablo E., 1995. "Financial development and economic growth," World Development, Elsevier, vol. 23(3), pages 433-448, March.
    10. Valerie R. Bencivenga & Bruce D. Smith, 1991. "Financial Intermediation and Endogenous Growth," Review of Economic Studies, Oxford University Press, vol. 58(2), pages 195-209.
    11. Greenwood, J. & Jovanovic, B., 1990. "Financial Development, Growth, And The Distribution Of Income," University of Western Ontario, The Centre for the Study of International Economic Relations Working Papers 9002, University of Western Ontario, The Centre for the Study of International Economic Relations.
    12. Levine, Ross, 1992. "Financial structures and economic development," Policy Research Working Paper Series 849, The World Bank.
    13. Tullio Jappelli & Marco Pagano, 1994. "Saving, Growth, and Liquidity Constraints," The Quarterly Journal of Economics, Oxford University Press, vol. 109(1), pages 83-109.
    14. Susan McLaughlin, 1995. "The impact of interstate banking and branching reform: evidence from the states," Current Issues in Economics and Finance, Federal Reserve Bank of New York, vol. 1(May).
    15. White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, vol. 48(4), pages 817-838, May.
    16. Robert M. Solow, 1956. "A Contribution to the Theory of Economic Growth," The Quarterly Journal of Economics, Oxford University Press, vol. 70(1), pages 65-94.
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