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Do efficient banking sectors accelerate economic growth in transition countries?

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  • Tuuli Koivu

    (Bank of Finland Institute for Economies in Transition)

Abstract

The relationship between financial sector and economic growth in transition countries has been largely ignored in the earlier empirical literature. In this paper, we analyse the finance-growth nexus using a fixed-effects panel model and unbalanced panel data from 25 transition countries during the period 1993-2000. We measure the qualitative development in the banking sectors using the margin between lending and deposit interest rates. Our second variable for the level of financial sector development is the amount of bank credit allocated to the private sector as a share of GDP. According to our results, the interest rate margin is significantly and negatively related to economic growth. This outcome is in line with theoretical models and has important policy implications. On the other hand, a rise in the amount of credit does not seem to accelerate economic growth. The main reasons behind this result could be the numerous banking crises the transition countries have experienced and the soft budget constraints that are still prevalent in many transition countries. Due to these specific characteristics the growth in credit has not always been sustainable and in some cases it may have led to a decline in growth rates.

Suggested Citation

  • Tuuli Koivu, 2002. "Do efficient banking sectors accelerate economic growth in transition countries?," Macroeconomics 0212013, EconWPA.
  • Handle: RePEc:wpa:wuwpma:0212013
    Note: Type of Document - PDF; prepared on PC; pages: 24; figures: included
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    Cited by:

    1. Belousova, Veronika & Karminsky, Alexander & Kozyr, Ilya, 2018. "Bank ownership and profit efficiency of Russian banks," BOFIT Discussion Papers 5/2018, Bank of Finland, Institute for Economies in Transition.
    2. Breuss, Fritz & Fink, Gerhard & Haiss, Peter, 2004. "How well prepared are the New Member States for the European Monetary Union?," Journal of Policy Modeling, Elsevier, vol. 26(7), pages 769-791, October.
    3. Vernikov, Andrei V., 2007. "Russia' banking sector transition : where to?," BOFIT Discussion Papers 5/2007, Bank of Finland, Institute for Economies in Transition.
    4. Gatti, Roberta & Love, Inessa, 2006. "Does access to credit improve productivity ? Evidence from Bulgarian firms," Policy Research Working Paper Series 3921, The World Bank.
    5. Laura Cojocaru & Saul Hoffman & Jeffrey Miller, 2011. "Financial Development and Economic Growth in Transition Economies: Empirical Evidence from the CEE and CIS Countries," Working Papers 11-22, University of Delaware, Department of Economics.
    6. Jaap Bos & Mindel van de Laar, 2004. "Explaining Foreign Direct Investment in Central and Eastern Europe: an Extended Gravity Approach," DNB Working Papers 008, Netherlands Central Bank, Research Department.
    7. Laura Cojocaru & Evangelos M. Falaris & Saul Hoffman & Jeffrey B. Miller, 2015. "Financial System Development and Economic Growth in Transition Economies:New Empirical Evidence from the CEE and CIS Countries," Working Papers 15-04, University of Delaware, Department of Economics.
    8. Jordan Kjosevski, 2013. "Banking Sector Development and Economic Growth in Central and Southeastern Europe Countries," Transition Studies Review, Springer;Central Eastern European University Network (CEEUN), vol. 19(4), pages 461-473, March.
    9. Javed AHMED & Malik Fahim BASHIR, 2016. "An empirical investigation of banking sector development and economic growth in a panel of selected SAARC countries," Theoretical and Applied Economics, Asociatia Generala a Economistilor din Romania - AGER, vol. 0(2(607), S), pages 65-72, Summer.
    10. Saša Obradović & Milka Grbić, 2015. "Causality Relationship between Financial Intermediation by Banks and Economic Growth: Evidence from Serbia," Prague Economic Papers, University of Economics, Prague, vol. 2015(1), pages 60-72.
    11. Adam, Anokye M. & Siaw, Frimpong, 2010. "Does financial sector development cause investment and growth? empirical analysis of the case of Ghana," MPRA Paper 39634, University Library of Munich, Germany.
    12. Aušrinė Lakštutienė & Aida Barkauskaitė, 2016. "Evaluation of relationship between banks lending activities and the economies in Baltic countries," Copernican Journal of Finance & Accounting, Uniwersytet Mikolaja Kopernika, vol. 5(1), pages 141-156.
    13. Pasali, Selahattin Selsah, 2013. "Where is the cheese ? synthesizing a giant literature on causes and consequences of financial sector development," Policy Research Working Paper Series 6655, The World Bank.
    14. Samargandi, Nahla & Kutan, Ali M., 2016. "Private credit spillovers and economic growth: Evidence from BRICS countries," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 44(C), pages 56-84.
    15. Mondher bellalah & SYED ALAMDAR ALI & Omar Masood, 2013. "Sensitivity Analysis of Domestic Credit to Private Sector in Pakistan: A Variable Replacement Approach Application with Con-integration," THEMA Working Papers 2013-17, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.
    16. Kurronen, Sanna, 2012. "Financial sector in resource-dependent economies," BOFIT Discussion Papers 6/2012, Bank of Finland, Institute for Economies in Transition.
    17. Kurronen, Sanna, 2015. "Financial sector in resource-dependent economies," Emerging Markets Review, Elsevier, vol. 23(C), pages 208-229.
    18. Fink, Gerhard & Haiss, Peter & Vuksic, Goran, 2009. "Contribution of financial market segments at different stages of development: Transition, cohesion and mature economies compared," Journal of Financial Stability, Elsevier, vol. 5(4), pages 431-455, December.

    More about this item

    Keywords

    financial sector; transition economies; economic growth; panel data;

    JEL classification:

    • E - Macroeconomics and Monetary Economics

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