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Too Much Finance?

Author

Listed:
  • Mr. Enrico G Berkes
  • Ugo Panizza
  • Mr. Jean-Louis Arcand

Abstract

This paper examines whether there is a threshold above which financial development no longer has a positive effect on economic growth. We use different empirical approaches to show that there can indeed be "too much" finance. In particular, our results suggest that finance starts having a negative effect on output growth when credit to the private sector reaches 100% of GDP. We show that our results are consistent with the "vanishing effect" of financial development and that they are not driven by output volatility, banking crises, low institutional quality, or by differences in bank regulation and supervision.

Suggested Citation

  • Mr. Enrico G Berkes & Ugo Panizza & Mr. Jean-Louis Arcand, 2012. "Too Much Finance?," IMF Working Papers 2012/161, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2012/161
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    More about this item

    Keywords

    WP; dummy variable; positive correlation; economic development; mis-specification error; Financial development; Economic Growth; Stock Markets; Banks; Finance-growth nexus; credit to the private sector; point estimate; System GMM; decreasing returns; Credit; Financial sector; Bank supervision; Financial sector development; Banking crises;
    All these keywords.

    JEL classification:

    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
    • 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
    • G1 - Financial Economics - - General Financial Markets

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