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Granularity in Banking and Growth: Does Financial Openness Matter?

  • F. 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 Halle Institute for Economic Research in its series IWH Discussion Papers with number 14.

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Date of creation: Oct 2013
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Handle: RePEc:iwh:dispap:14-13
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  1. Franziska Bremus & Claudia Buch & Katheryn Russ & Monika Schnitzer, 2013. "Big Banks and Macroeconomic Outcomes: Theory and Cross-Country Evidence of Granularity," NBER Working Papers 19093, National Bureau of Economic Research, Inc.
  2. Kose, M. Ayhan & Prasad, Eswar & Taylor, Ashley D., 2009. "Thresholds in the Process of International Financial Integration," IZA Discussion Papers 4133, Institute for the Study of Labor (IZA).
  3. 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.
  4. Stephen Cecchetti & Enisse Kharroubi, 2012. "Reassessing the impact of finance on growth," BIS Working Papers 381, Bank for International Settlements.
  5. Martin Schindler, 2009. "Measuring Financial Integration: A New Data Set," IMF Staff Papers, Palgrave Macmillan, vol. 56(1), pages 222-238, April.
  6. Laura Alfaro & Sebnem Kalemli-Ozcan & Vadym Volosovych, 2005. "Why Doesn't Capital Flow from Rich to Poor Countries? An Empirical Investigation," NBER Working Papers 11901, National Bureau of Economic Research, Inc.
  7. Stijn Claessens & Neeltje Horen, 2014. "Foreign Banks: Trends and Impact," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 46(s1), pages 295-326, 02.
  8. Rose, Andrew K & Wieladek, Tomasz, 2011. "Financial Protectionism: the First Tests," CEPR Discussion Papers 8404, C.E.P.R. Discussion Papers.
  9. Peter Blair Henry, 2006. "Capital Account Liberalization: Theory, Evidence, and Speculation," NBER Working Papers 12698, National Bureau of Economic Research, Inc.
  10. Kremer, Stephanie & Bick, Alexander & Nautz, Dieter, 2009. "Inflation and growth: new evidence from a dynamic panel threshold analysis," Discussion Papers 2009/9, Free University Berlin, School of Business & Economics.
  11. Julian di Giovanni & Andrei A. Levchenko, 2009. "Trade Openness and Volatility," The Review of Economics and Statistics, MIT Press, vol. 91(3), pages 558-585, August.
  12. Enrico Berkes & Ugo Panizza & Jean-Louis Arcand, 2012. "Too Much Finance?," IMF Working Papers 12/161, International Monetary Fund.
  13. di Giovanni, Julian & Levchenko, Andrei A. & Rancière, Romain, 2011. "Power laws in firm size and openness to trade: Measurement and implications," Journal of International Economics, Elsevier, vol. 85(1), pages 42-52, September.
  14. Claudia M. Buch & Katja Neugebauer, 2010. "Bank-Specific Shocks and the Real Economy," Working Paper / FINESS 2.3, DIW Berlin, German Institute for Economic Research.
  15. Hansen, Bruce E., 1999. "Threshold effects in non-dynamic panels: Estimation, testing, and inference," Journal of Econometrics, Elsevier, vol. 93(2), pages 345-368, December.
  16. Blank, Sven & Buch, Claudia M. & Neugebauer, Katja, 2009. "Shocks at large banks and banking sector distress: The Banking Granular Residual," Journal of Financial Stability, Elsevier, vol. 5(4), pages 353-373, December.
  17. Bruce E. Hansen, 2000. "Sample Splitting and Threshold Estimation," Econometrica, Econometric Society, vol. 68(3), pages 575-604, May.
  18. Alan M. Taylor, 2012. "The Great Leveraging," NBER Working Papers 18290, National Bureau of Economic Research, Inc.
  19. Xavier Gabaix, 2009. "The Granular Origins of Aggregate Fluctuations," NBER Working Papers 15286, National Bureau of Economic Research, Inc.
  20. Johannes Pockrandt & Sören Radde, 2012. "Need for Reform of EU Banking: Decoupling the Solvency of Banks and Sovereigns," DIW Economic Bulletin, DIW Berlin, German Institute for Economic Research, vol. 2(11), pages 11-18.
  21. repec:ecl:ucdeco:10-8 is not listed on IDEAS
  22. 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.
  23. Michael W. Klein, 2012. "Capital Controls: Gates versus Walls," NBER Working Papers 18526, National Bureau of Economic Research, Inc.
  24. Menzie D. Chinn & Hiro Ito, 2005. "What Matters for Financial Development? Capital Controls, Institutions, and Interactions," NBER Working Papers 11370, National Bureau of Economic Research, Inc.
  25. Peter Henry, 2007. "Capital Account Liberalization: Theory, Evidence, and Speculation," Discussion Papers 07-004, Stanford Institute for Economic Policy Research.
  26. Bick, Alexander, 2010. "Threshold effects of inflation on economic growth in developing countries," Economics Letters, Elsevier, vol. 108(2), pages 126-129, August.
  27. Beatriz de Blas & Katheryn Russ, 2010. "FDI in the Banking Sector," Working Papers 108, University of California, Davis, Department of Economics.
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