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What determines the finance-growth nexus? An endogenous growth model and empirical evidence

  • Graff, Michael
  • Karmann, Alexander

An endogenous growth model with a financial sector is formulated, and empirical analyses are conducted. The model exhibits structural shifts and breaks caused by institutional change, suggesting that a linear approach is inadequate. To address this point empirically, we fit data for 90 countries from 1960–2000 to a standard growth equation with a proxy for financial activity. Firstly, it is shown that a growth enhancing outcome of financial activity is contingent on a sound institutional framework. Then, we order the sample by control variables which follow from the model as potential causes of breaks in the adjustment process. Threshold regressions reveal non-linearity that is consistent with the model. Most importantly, we find signs for excessive financial activity.

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Paper provided by Dresden University of Technology, Faculty of Business and Economics, Department of Economics in its series Dresden Discussion Paper Series in Economics with number 15/03.

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Date of creation: 2003
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Handle: RePEc:zbw:tuddps:1503
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