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Further Statistical Debate on "Too Much Finance"

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  • William R. Cline

    () (Peterson Institute for International Economics)

Abstract

This paper evaluates recent findings by researchers at the Organization for Economic Cooperation and Development (OECD) on "too much finance." It first critiques the OECD findings, which seem to imply that the optimal amount of finance is zero, given the linear specification of the main tests. It then finds that the negative impact of additional finance on growth is reversed when the appropriate (purchasing-power-parity) per capita income is applied and country fixed effects are removed. Separate tests for countries with intermediated finance below and above 60 percent of GDP show a significant positive effect of finance on growth in the lower group but an insignificant effect in the higher group. An appendix replies to critics of my earlier study (Cline 2015b) in which I argued that an estimated negative quadratic effect of finance on growth was likely to be a spurious correlation reflecting convergence-based lower growth at higher per capita incomes. It notes that the critics' own logarithmic tests, yielding a positive marginal impact of finance on growth even at high levels, achieve comparable explanation to their quadratic form yielding a negative marginal impact. It finds that adding dummy variables for below and above intermediate financial depth to the logarithmic form does not support the inverse U influence found in the quadratic form.

Suggested Citation

  • William R. Cline, 2015. "Further Statistical Debate on "Too Much Finance"," Working Paper Series WP15-16, Peterson Institute for International Economics.
  • Handle: RePEc:iie:wpaper:wp15-16
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    File URL: https://piie.com/publications/working-papers/further-statistical-debate-too-much-finance
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    References listed on IDEAS

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    1. Robert C. Feenstra & Robert Inklaar & Marcel P. Timmer, 2015. "The Next Generation of the Penn World Table," American Economic Review, American Economic Association, vol. 105(10), pages 3150-3182, October.
    2. 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.
    3. N. Gregory Mankiw & David Romer & David N. Weil, 1992. "A Contribution to the Empirics of Economic Growth," The Quarterly Journal of Economics, Oxford University Press, vol. 107(2), pages 407-437.
    4. Sachs, Jeffrey D. & Warner, Andrew M., 1999. "The big push, natural resource booms and growth," Journal of Development Economics, Elsevier, vol. 59(1), pages 43-76, June.
    5. Jo Thori Lind & Halvor Mehlum, 2010. "With or Without U? The Appropriate Test for a U-Shaped Relationship," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 72(1), pages 109-118, February.
    6. William R. Cline, 2015. "Too Much Finance, or Statistical Illusion?," Policy Briefs PB15-9, Peterson Institute for International Economics.
    7. William Hauk & Romain Wacziarg, 2009. "A Monte Carlo study of growth regressions," Journal of Economic Growth, Springer, vol. 14(2), pages 103-147, June.
    8. Boris Cournède & Oliver Denk, 2015. "Finance and economic growth in OECD and G20 countries," OECD Economics Department Working Papers 1223, OECD Publishing.
    9. Enrico Berkes & Ugo Panizza & Jean Louis Arcand, 2015. "Too Much Finance or Statistical Illusion: A Comment," IHEID Working Papers 12-2015, Economics Section, The Graduate Institute of International Studies.
    10. Ratna Sahay & Martin Cihak & Papa M N'Diaye & Adolfo Barajas & Diana B Ayala Pena & Ran Bi & Yuan Gao & Annette J Kyobe & Lam Nguyen & Christian Saborowski & Katsiaryna Svirydzenka & Reza Yousefi, 2015. "Rethinking Financial Deepening; Stability and Growth in Emerging Markets," IMF Staff Discussion Notes 15/08, International Monetary Fund.
    11. Nazrul Islam, 1995. "Growth Empirics: A Panel Data Approach," The Quarterly Journal of Economics, Oxford University Press, vol. 110(4), pages 1127-1170.
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    Cited by:

    1. repec:pal:compes:v:60:y:2018:i:1:d:10.1057_s41294-018-0056-6 is not listed on IDEAS
    2. Duygu Yolcu Karadam & Erdal Özmen, 2016. "Real Exchange Rates and Growth," ERC Working Papers 1609, ERC - Economic Research Center, Middle East Technical University, revised Sep 2016.

    More about this item

    Keywords

    financial depth; too much finance; cross-country growth; private credit; convergence;

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • O43 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Institutions and Growth
    • O47 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence
    • O57 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Comparative Studies of Countries

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