Financial Development, Financial Fragility, and Growth
The authors study the apparent contradiction between two strands of the literature on the effects of financial intermediation on economic activity. On the one hand, the empirical growth literature finds a positive effect of financial depth as measu...
| Main Authors: | , |
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| Language: | English en_US |
| Published: |
World Bank, Washington, D.C.
2013
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| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/2004/10/5278725/financial-development-financial-fragility-growth http://hdl.handle.net/10986/14233 |
| Summary: | The authors study the apparent
contradiction between two strands of the literature on the
effects of financial intermediation on economic activity. On
the one hand, the empirical growth literature finds a
positive effect of financial depth as measured by, for
instance, private domestic credit and liquid liabilities
(for example, Levine, Loayza, and Beck 2000). On the other
hand, the banking and currency crisis literature finds that
monetary aggregates, such as domestic credit, are among the
best predictors of crises and their related economic
downturns (for example, Kaminski and Reinhart 1999). The
authors account for these contrasting effects based on the
distinction between the short- and long-run impacts of
financial intermediation. Working with a panel of
cross-country and time-series observations, they estimate an
encompassing model of short- and long-run effects using the
Pooled Mean Group estimator developed by Pesaran, Shin, and
Smith (1999). Their conclusion from this analysis is that a
positive long-run relationship between financial
intermediation and output growth coexists with a mostly
negative short-run relationship. The authors further develop
an explanation for these contrasting effects by relating
them to recent theoretical models, by linking the estimated
short-run effects to measures of financial fragility
(namely, banking crises and financial volatility), and by
jointly analyzing the effects of financial depth and
fragility in classic panel growth regressions. |
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