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A reevaluation of the impact of financial development on economic growth and its sources by regions

  • Dabos, Marcelo
  • Williams, Tomas

This work estimates the impact of Private Credit to the private sector and Liquid Liabilities (as measures of financial development) on economic growth, capital growth and productivity growth for different regions. Estimations are conducted with a panel database of 78 countries and 35 years using GMM system estimator method for dynamic panel data, correcting by Windme¼er (2005) robust errors and using fewer and relevant instruments compared to the established procedure in the literature of financial development and economic growth. We consider four geographical regions, Latin Amerca, Europe and North America, Asia and Africa. The results with this new methodology, that improves the inference over the usual one used in the literature , suggest a significant effect of financial development in economic growth for the entire panel (for the measue of Liquid Liabilities) and Latin America. We find no evidence of an effect of our financial development measures over physical capital accumulation but there is a positive effect of financial development, measure by liquidity, over total factor productivity growth. The effect of financial development over economic growth is greater in the less developed regions.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 27297.

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Date of creation: 02 Dec 2009
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Handle: RePEc:pra:mprapa:27297
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  1. Richard Blundell & Steve Bond, 1995. "Initial conditions and moment restrictions in dynamic panel data models," IFS Working Papers W95/17, Institute for Fiscal Studies.
  2. Ross Levine, 2004. "Finance and Growth: Theory and Evidence," NBER Working Papers 10766, National Bureau of Economic Research, Inc.
  3. Michael Clemens & Samuel Bazzi, 2009. "Blunt Instruments: On Establishing the Causes of Economic Growth," Working Papers 171, Center for Global Development.
  4. Lucas, Robert Jr., 1988. "On the mechanics of economic development," Journal of Monetary Economics, Elsevier, vol. 22(1), pages 3-42, July.
  5. Peter L. Rousseau & Paul Wachtel, 2009. "What is Happening to the Impact of Financial Deepening on Economic Growth?," Vanderbilt University Department of Economics Working Papers 0915, Vanderbilt University Department of Economics.
  6. Felix Rioja & Neven Valev, 2004. "Finance and the Sources of Growth at Various Stages of Economic Development," Economic Inquiry, Western Economic Association International, vol. 42(1), pages 127-140, January.
  7. Levine, Ross & Loayza, Norman & Beck, Thorsten, 1999. "Financial intermediation and growth : Causality and causes," Policy Research Working Paper Series 2059, The World Bank.
  8. Daron Acemoglu & Simon Johnson & James A. Robinson, 2001. "The Colonial Origins of Comparative Development: An Empirical Investigation," American Economic Review, American Economic Association, vol. 91(5), pages 1369-1401, December.
  9. Pablo Emilio Guidotti & Jose De Gregorio, 1992. "Financial Development and Economic Growth," IMF Working Papers 92/101, International Monetary Fund.
  10. José Pablo Dapena, 2009. "Rol del mercado de capitales en el crecimiento de la economía: literatura y evidencia para Argentina," CEMA Working Papers: Serie Documentos de Trabajo. 393, Universidad del CEMA.
  11. Beck , Thorsten & Demirguc-Kunt, Asli & Levine, Ross, 2009. "Financial institutions and markets across countries and over time - data and analysis," Policy Research Working Paper Series 4943, The World Bank.
  12. Arellano, Manuel & Bover, Olympia, 1995. "Another look at the instrumental variable estimation of error-components models," Journal of Econometrics, Elsevier, vol. 68(1), pages 29-51, July.
  13. Windmeijer, Frank, 2005. "A finite sample correction for the variance of linear efficient two-step GMM estimators," Journal of Econometrics, Elsevier, vol. 126(1), pages 25-51, May.
  14. Thomas Gries & Manfred Kraft & Daniel Meierrieks, 2008. "Financial Deepening, Trade Openness and Economic Growth in Latin America and the Caribbean," Working Papers CIE 17, Paderborn University, CIE Center for International Economics.
  15. 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.
  16. David Roodman, 2009. "A Note on the Theme of Too Many Instruments," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 71(1), pages 135-158, 02.
  17. Beck, Thorsten & Levine, Ross & Loayza, Norman, 1999. "Finance and the sources of growth," Policy Research Working Paper Series 2057, The World Bank.
  18. Rioja, Felix & Valev, Neven, 2004. "Does one size fit all?: a reexamination of the finance and growth relationship," Journal of Development Economics, Elsevier, vol. 74(2), pages 429-447, August.
  19. Manuel Arellano & Stephen Bond, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Oxford University Press, vol. 58(2), pages 277-297.
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