IDEAS home Printed from
MyIDEAS: Login to save this paper or follow this series

State dependence in the finance-growth nexus: A functional coefficient approach

  • Herwartz, Helmut
  • Walle, Yabibal M.

Noting that 'one size does not fit all' in the case of the finance-growth (FG) nexus, a growing body of literature has recently focused on uncovering economic conditions under which financial development could be beneficial (detrimental) to economic development. We look into these conditions by means of a flexible semiparametric approach which allows the long-run FG nexus to depend on measurable economic states. Using annual data for 74 economies spanning the period 1975-2005, we find that the level of financial development shows a strong positive impact on the FG nexus. Moreover, although the impact of finance on growth is generally higher in high-income economies, allowing for intra-group variations reveals scenarios where the impact could be higher in low-income economies. However, the FG link could also be negative if low- and lower-middle-income economies have very large governments or are extremely open to international trade.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL:
Download Restriction: no

Paper provided by University of Goettingen, Department of Economics in its series Center for European, Governance and Economic Development Research Discussion Papers with number 156.

in new window

Date of creation: 2013
Date of revision:
Handle: RePEc:zbw:cegedp:156
Contact details of provider: Postal: Platz der Göttinger Sieben 3, 37073 Göttingen
Web page:

More information through EDIRC

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. M. Kabir Hassan & Jung Suk-Yu, 2007. "Financial Development and Economic Growth: New Evidence from Panel Data," NFI Working Papers 2007-WP-10, Indiana State University, Scott College of Business, Networks Financial Institute.
  2. Ross Levine & Norman Loayza & Thorsten Beck, 2002. "Financial Intermediation and Growth: Causality and Causes," Central Banking, Analysis, and Economic Policies Book Series, in: Leonardo Hernández & Klaus Schmidt-Hebbel & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Se (ed.), Banking, Financial Integration, and International Crises, edition 1, volume 3, chapter 2, pages 031-084 Central Bank of Chile.
  3. Ang, James B., 2008. "What are the mechanisms linking financial development and economic growth in Malaysia," Economic Modelling, Elsevier, vol. 25(1), pages 38-53, January.
  4. Jeremy Greenwood & Boyan Jovanovic, 1989. "Financial Development, Growth, and the Distribution of Income," NBER Working Papers 3189, National Bureau of Economic Research, Inc.
  5. Peter L. Rousseau & Paul Wachtel, 2011. "What Is Happening To The Impact Of Financial Deepening On Economic Growth?," Economic Inquiry, Western Economic Association International, vol. 49(1), pages 276-288, 01.
  6. 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.
  7. Christopoulos, Dimitris K. & Tsionas, Efthymios G., 2004. "Financial development and economic growth: evidence from panel unit root and cointegration tests," Journal of Development Economics, Elsevier, vol. 73(1), pages 55-74, February.
  8. Stock, James H & Watson, Mark W, 1993. "A Simple Estimator of Cointegrating Vectors in Higher Order Integrated Systems," Econometrica, Econometric Society, vol. 61(4), pages 783-820, July.
  9. Demetriades, Panicos O. & Andrianova, Svetlana, 2005. "Sources and Effectiveness of Financial Development: What We Know and What We Need to Know," Working Paper Series RP2005/76, World Institute for Development Economic Research (UNU-WIDER).
  10. Obstfeld, Maurice, 1992. "Risk-Taking, Global Diversification, and Growth," CEPR Discussion Papers 688, C.E.P.R. Discussion Papers.
  11. Levin, Andrew & Lin, Chien-Fu & James Chu, Chia-Shang, 2002. "Unit root tests in panel data: asymptotic and finite-sample properties," Journal of Econometrics, Elsevier, vol. 108(1), pages 1-24, May.
  12. Ross Levine, 2004. "Finance and Growth: Theory and Evidence," NBER Working Papers 10766, National Bureau of Economic Research, Inc.
  13. James B. Ang & Warwick J. McKibbin, 2005. "Financial Liberalization, Financial Sector Development And Growth: Evidence From Malaysia," CAMA Working Papers 2005-05, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  14. Ahmed, Abdullahi D., 2013. "Effects of financial liberalization on financial market development and economic performance of the SSA region: An empirical assessment," Economic Modelling, Elsevier, vol. 30(C), pages 261-273.
  15. L. Deidda, 1999. "Interaction between Economic and Financial Development," Working Paper CRENoS 199913, Centre for North South Economic Research, University of Cagliari and Sassari, Sardinia.
  16. Thanasis Stengos & Andreas Savvides & Theofanis Mamuneas & Elena Ketteni, 2007. "Is the Financial Development and Economic Growth Relationship Nonlinear?," Economics Bulletin, AccessEcon, vol. 15(14), pages 1-12.
  17. Hakan Yilmazkuday, 2011. "Thresholds in the Finance-Growth Nexus: A Cross-Country Analysis," World Bank Economic Review, World Bank Group, vol. 25(2), pages 278-295, May.
  18. Herwartz, Helmut & Xu, Fang, 2007. "A new approach to bootstrap inference in functional coefficient models," Economics Working Papers 2007,15, Christian-Albrechts-University of Kiel, Department of Economics.
  19. Xu, Zhenhui, 2000. "Financial Development, Investment, and Economic Growth," Economic Inquiry, Western Economic Association International, vol. 38(2), pages 331-44, April.
  20. repec:tpr:qjecon:v:108:y:1993:i:3:p:717-37 is not listed on IDEAS
  21. Thomas Barnebeck Andersen & Finn Tarp, 2003. "Financial liberalization, financial development and economic growth in LDCs," Journal of International Development, John Wiley & Sons, Ltd., vol. 15(2), pages 189-209.
  22. Pablo Emilio Guidotti & Jose De Gregorio, 1992. "Financial Development and Economic Growth," IMF Working Papers 92/101, International Monetary Fund.
  23. James B. Ang, 2008. "A Survey Of Recent Developments In The Literature Of Finance And Growth," Journal of Economic Surveys, Wiley Blackwell, vol. 22(3), pages 536-576, 07.
  24. L. Deidda & B. Fattouh, 2001. "Non linearity between finance and growth," Working Paper CRENoS 200104, Centre for North South Economic Research, University of Cagliari and Sassari, Sardinia.
  25. King, Robert G. & Levine, Ross, 1993. "Finance and growth : Schumpeter might be right," Policy Research Working Paper Series 1083, The World Bank.
  26. Baltagi, Badi H. & Demetriades, Panicos O. & Law, Siong Hook, 2009. "Financial development and openness: Evidence from panel data," Journal of Development Economics, Elsevier, vol. 89(2), pages 285-296, July.
  27. Lucas, Robert Jr., 1988. "On the mechanics of economic development," Journal of Monetary Economics, Elsevier, vol. 22(1), pages 3-42, July.
  28. Geert Bekaert & Campbell R. Harvey & Christian Lundblad, 2009. "Financial Openness and Productivity," NBER Working Papers 14843, National Bureau of Economic Research, Inc.
  29. Zongwu Cai & Jianqing Fan & Qiwei Yao, 2000. "Functional-coefficient regression models for nonlinear time series," LSE Research Online Documents on Economics 6314, London School of Economics and Political Science, LSE Library.
  30. Saikkonen, Pentti, 1991. "Asymptotically Efficient Estimation of Cointegration Regressions," Econometric Theory, Cambridge University Press, vol. 7(01), pages 1-21, March.
  31. Hausman, Jerry A, 1978. "Specification Tests in Econometrics," Econometrica, Econometric Society, vol. 46(6), pages 1251-71, November.
  32. Panicos O. Demetriades & Khaled A.Hussein, 1995. "Does Financial Development Cause Economic Growth? Time-Series Evidence from 16 Countries," Keele Department of Economics Discussion Papers (1995-2001) 95/13, Department of Economics, Keele University.
  33. Breusch, T S, 1978. "Testing for Autocorrelation in Dynamic Linear Models," Australian Economic Papers, Wiley Blackwell, vol. 17(31), pages 334-55, December.
  34. Yongfu Huang, 2005. "What determines financial development?," Bristol Economics Discussion Papers 05/580, Department of Economics, University of Bristol, UK.
  35. Rousseau, Peter L. & Wachtel, Paul, 2002. "Inflation thresholds and the finance-growth nexus," Journal of International Money and Finance, Elsevier, vol. 21(6), pages 777-793, November.
  36. Nicholas Apergis & Ioannis Filippidis & Claire Economidou, 2007. "Financial Deepening and Economic Growth Linkages: A Panel Data Analysis," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 143(1), pages 179-198, April.
  37. Ho-Chuan Huang & Shu-Chin Lin, 2009. "Non-linear finance-growth nexus," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 17(3), pages 439-466, 07.
  38. Temple, Jonathan, 2000. " Inflation and Growth: Stories Short and Tall," Journal of Economic Surveys, Wiley Blackwell, vol. 14(4), pages 395-426, September.
  39. Rousseau, Peter L. & Yilmazkuday, Hakan, 2009. "Inflation, financial development, and growth: A trilateral analysis," Economic Systems, Elsevier, vol. 33(4), pages 310-324, December.
  40. Thorsten Beck & Asli Demirgüç-Kunt & Ross Levine, 2000. "A New Database on the Structure and Development of the Financial Sector," World Bank Economic Review, World Bank Group, vol. 14(3), pages 597-605, September.
  41. Godfrey, Leslie G, 1978. "Testing against General Autoregressive and Moving Average Error Models When the Regressors Include Lagged Dependent Variables," Econometrica, Econometric Society, vol. 46(6), pages 1293-1301, November.
  42. King, Robert G. & Levine, Ross, 1993. "Finance and growth : Schumpeter might be right," Policy Research Working Paper Series 1083, The World Bank.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:zbw:cegedp:156. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (ZBW - German National Library of Economics)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.