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Please use this identifier to cite or link to this item:
http://hdl.handle.net/2451/26108
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| Title: | "Economic Growth and Financial Depth: Is the Relationship Extinct Already?" |
| Authors: | Rousseau, Peter L.
Wachtel, Paul |
| Keywords: | finance-growth nexus
rolling regression
robustness
cross-country growth |
| Issue Date: | 2-Jul-2005 |
| Series/Report no.: | EC-05-15 |
| Abstract: | Although the finance-growth nexus has become firmly entrenched in the
empirical literature, studies that question the strength of the
empirical results have appeared and seem to have become more frequent as
well. In this paper we reexamine the core crosscountry panel results
that established the relationship between financial depth and growth
rates. We examine the sensitivity of the core result to changes in time
period and variation in the sample of countries included. We find that
the finance-growth relationship in not as strong with more recent data
as it was in the original studies with data for the period from 1960 to
1989. We offer two possible explanations. First, financial depth may
have had greater value as a shock absorber in the 1970s and 80s, decades
characterized by worldwide nominal shocks. Second, the spread of
financial liberalization in the 1980s may have led to increasing
financial depth in countries that lacked the legal or regulatory
infrastructure to successfully exploit financial development. We use a
rolling regression technique to see which countries provide stronger
support for the finance growth relationship. Among poorer counties, the
relationship is positive but imprecisely measured and among very rich
countries it is absent. However, there is clear indication that
financial deepening increases growth among the countries with real GDP
per capita between $3,000 and $12,000 (1995 US). In a word, we find the
widely accepted effect of finance on growth to be still present but fragile. |
| URI: | http://hdl.handle.net/2451/26108 |
| Appears in Collections: | Economics Working Papers
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