finance and the sources of growth at various stages of economic development this article studies the effects of financial development on the sources of growth in different groups of countries recent theoretical work shows that financial development may affect productivity and capital accumulation in different ways in industrial versus developing countries this hypothesis is tested with panel data from 74 countries using gmm dynamic panel techniques results are consistent with the hypothesis finance has a strong positive influence on productivity growth primarily in more developed economies in less developed economies the effect of finance on output growth occurs primarily through capital accumulation jel o4 g1

learning and time varying macroeconomic volatility abstract this paper presents a dsge model in which agents learning about the economy can endogenously generate time varying macroeconomic volatility economic agents use simple models to form expectations and need to learn the relevant parameters their gain coefficient is endogenous and is adjusted according to past forecast errors the model is estimated using likelihood based bayesian methods the endogenous gain is jointly estimated with the structural parameters of the system the estimation results show that private agents appear to have often switched to constant gain learning with a high constant gain during most of the 1970s and until the early 1980s while reverting to a decreasing gain later on as a result the model can generate a pattern of volatility which is increasing in the 1970s and falling in the second half of the sample with a decline that can roughly match the magnitude of the so called great moderation in the 1984 2007 period the paper also documents how a failure to incorporate learning into the estimation may lead econometricians to spuriously find time varying volatility in the exogenous shocks even when these have constant variance by construction

does deposit insurance retard the development of non bank financial markets whether and how the introduction of deposit insurance affects non bank financial market development depends on whether banks and non bank financial markets are substitutes or complements and theory has conflicting views using data on 134 countries over a 28 year period and several identification strategies we find that the introduction of deposit insurance retards the equity market the non bank depositaries sector and the banking sector when law and order is weak while strong law and order mitigates this effect it does not lead to a positive outcome for all markets for non bank financial markets the effect is greater in the long run so that while deposit insurance increases banking sector development in the long run it retards non bank financial markets regardless of the level of law and order finally several design features exacerbate the negative outcomes our results have important policy implications for implementing or altering deposit insurance schemes

the finance growth nexus evidence from bank branch deregulation this paper provides evidence that financial markets can directly affect economic growth by studying the relaxation of bank branch restrictions in the united states we find that the rates of real per capita growth in income and output increase significantly following intrastate branch reform we also argue that the observed changes in growth are the result of changes in the banking system improvements in the quality of bank lending not increased volume of bank lending appear to be responsible for faster growth

learning and control in a changing economic environment abstract in this paper we investigate optimal bayesian learning and control with lagged dependent variables and time varying unknown parameters we assess both the performance of alternative decision rules as in the computationally oriented dual control literature as well as the dynamics of learning and convergence of beliefs as in the more theoretically oriented bayesian learning literature our numerical results indicate that the optimal decision rule involves a noticeable degree of experimentation for moderate to large levels of uncertainty in most situations though the optimal rule will remain less activist than a certainty equivalent rule and induce gradualism exceptions occur when the process to be controlled is near the deterministic steady state in this situation we find that the decision maker will repeatedly undertake costly experiments the extent of optimal experimentation is lower if the unknown parameter is perceived to vary over time in contrast to the fixed parameter case however parameter uncertainty is continually renewed and the incentive to experiment never ceases

the financial development and growth nexus a meta analysis this is the accepted manuscript the final version is available from wiley at http onlinelibrary wiley com doi 10 1111 joes 12086 abstract

financial development and economic growth a meta analysis we analyze 1334 estimates from 67 studies that examine the effect of financial development on economic growth taken together the studies imply a positive and statistically significant effect but the individual estimates vary widely we find that both research design and heterogeneity in the underlying effect play a role in explaining the differences in results studies that do not address endogeneity tend to overstate the effect of finance on growth while the effect seems to be weaker in less developed countries the effect decreases worldwide after the 1980s our results also suggest that stock markets support faster economic growth than other financial intermediaries

the drivers of responsible investment the case of european pension funds we investigate what drives responsible investment of european pension funds pension funds are institutional investors who assure the income of part of the population for a long period of time increasingly stakeholders hold pension funds accountable for the non financial consequences of their investments and many funds have engaged in responsible investing however it appears that there is a wide difference between pension funds in this respect we investigate what determines pension funds responsible investments on the basis of a survey of more than 250 pension funds in 15 european countries in 2010 we use multinomial logistic regression and find that especially legal origin of the country ownership of the pension fund and fund size related variables are to be associated with pension funds responsible investment for fund size we establish a curvilinear relationship especially the smallest and largest pension funds in the sample tend to engage with responsible investing

financial inclusion and poverty a tale of forty five thousand households abstractusing a new nationally representative survey data covering approximately 45 000 indian households we examine the effects of financial inclusion on poverty we construct a multidimensional

the stability of macroeconomic systems with bayesian learners we study abstract macroeconomic systems in which expectations play an important role consistent with the recent literature on recursive learning and expectations we replace the agents in the economy with econometricians unlike the recursive learning literature however the econometricians in the analysis here are bayesian learners we are interested in the extent to which expectational stability remains the key concept in the bayesian environment we isolate conditions under which versions of expectational stability conditions govern the stability of these systems just as in the standard case of recursive learning we conclude that bayesian learning schemes while they are more sophisticated do not alter the essential expectational stability findings in the literature

is the glass steagall act justified a study of the u s experience with universal banking before the glass steagall act of 1933 removed commercial banks from the securities underwriting business we evaluate the argument for the separation of commercial and investment banking that conflicts of interest induce commercial banks to fool the public into investing in securities which turn out to be of low quality a comparison of the performance of securities underwritten by commercial and investment banks prior to the act shows no evidence of this instead the public appears to have rationally accounted for the possibility of conflicts of interest and this appears to have constrained the banks to underwrite high quality securities jel g21 g24 n22

why aren t countries rich weak states and bad neighbourhoods this article challenges a common viewpoint that the policy choices made by state leaders are central to explanations of economic growth it argues that there are two possible flaws in this viewpoint first that state leaders have a free choice in policy decisions second that it is policies that in large part determine growth rates using a set of variables designed to capture the weakness of the policy autonomy of the state and possible non policy influences on growth rates the article concludes that initial conditions are a better determinant of wealth and growth than free policy choice

same financial development yet different economic growth why we re study the relationship between financial development and real gdp per capita growth in 48 countries what we find is an interesting evidence that only stock market development has positive effects on growth and that banking development has an unfavorable if not negative effect on growth we examine whether or not these impacts are a product of various financial and economic conditional variables our conditional variables consist of financial liberalization two sets of country development dummies crises in banking and currency dummies the creditor protection index as well as the anti director and corruption indices our results clearly show that the conditional variables of financial liberalization high income level and good shareholder protection mitigate the negative impacts of banking development on growth in contrast the conditional variables of middle income level regional latin american sub saharan african and east asian dummies banking and currency crises good creditor protection and higher corruption strengthen the negative impacts of banking development on growth next the conditional variables of middle income level latin american sub saharan african and east asian dummies strengthen the positive impacts of stock market development on growth whereas the conditional variables of financial liberalization mitigate the positive impacts of stock market development on growth last we find that the relationship between growth and bank development is better described as a weak inverse ushape this inverse u shape becomes stronger when additional stock market variables are squared thus financial development and growth may in fact be in a nonlinear form

is the relationship between financial development and economic growth monotonic evidence from a sample of middle income countries summary we revisit the relationship between financial development and economic growth in a panel of 52 middle income countries over the 1980 2008 period using pooled mean group estimations in a dynamic heterogeneous panel setting we show that there is an inverted u shaped relationship between finance and growth in the long run in the short run the relationship is insignificant this suggests that too much finance can exert a negative influence on growth in middle income countries the finding of a non monotonic effect of financial development on growth is confirmed by estimating a threshold model

monetary policy and bank lending in the euro area is there a stock market channel or an interest rate channel abstract in this paper i compare a traditional demand oriented model of bank lending with its focus on short term interest rates in the money market to a non traditional capital budgeting model of bank lending based on movements in share valuations for the euro area using non nested hypothesis tests omitted variables tests and granger causality tests i reject the traditional demand oriented model of bank lending and fail to reject the capital budgeting model of bank lending for monetary financial institutions mfi s in the euro area even though europe is a bank based financial system it appears the stock market plays a key role in the lending decisions and allocation of resources in europe one possible policy implication of this research is that the central bank should try and stabilize stock prices in order to achieve their goal of stabilizing bank lending and the economy

the quality and quantity of bank intermediation and economic growth evidence from asia pacific we investigate the impact of the quantity and quality of bank intermediation on economic growth across 14 asia pacific economies over 2003 2015 measures of bank shareholder value efficiency as wel

a model and some evidence concerning the influence of discrimination on wages the observed wage gap between men and women is widely attributed to discrimination in the workplace yet within the context of the standard neoclassical framework discrimination is neither a necessary nor sufficient condition this paper presents a modified neoclassical model which supports equilibrium wage differentials and which has testable implications the paper also surmounts a difficulty that has plagued many earlier assessments separating prejudice from other explanations of the wage gap by directing attention away from wages to other implied effects of discrimination our model offers cleaner tests of the impact of prejudice in labor markets results of such tests are reported

financial markets in development and the development of financial markets what is the relationship between markets and development it is argued that markets promote growth and that growth in turn encourages the formation of markets two models with endogenous market formation are presented to analyze this issue the first examines the role that financial markets banks and stock markets play in allocating funds to the highest valued use in the economic system it is shown that intermediation will arise under weak conditions the second focuses on the role that markets play in supporting specialization in economic activity the consequences of perfect competition in market formation are highlighted

a survey of recent developments in the literature of finance and growth this paper provides a survey of the recent progress in the literature of financial development and economic growth the survey highlights that most empirical studies focus on either testing the role of financial development in stimulating economic growth or examining the direction of causality between these two variables although the positive role of finance on growth has become a stylized fact there are some methodological reservations about the results from these empirical studies several key issues unresolved in the literature are highlighted the paper also points to several directions for future research

financial intermediation and economic performance historical evidence from five industrialized countries this paper examines the nature of links between the intensity of financial intermediation and economic performance that operated in the united states the united kingdom canada norway and sweden over the 1870 1929 period after describing the coevolution of the financial and real sectors in these countries vector error correction models vecms establish the quantitative importance of long run relationships among measures of financial intensity and real per capita levels of output and the monetary base granger causality tests then suggest a leading role for the intermediation variables in real sector activity while feedback effects are largely insignificant the results suggest an important role for intermediation in the rapid industrial transformations of all five countries

the effect of financial development on economic growth a meta analysis in this article we contribute to the current debate on the sign and size of the finance growth relation to this purpose we use a meta analysis with 551 estimates from 68 empirical studies that t

the use of earnings variance in testing the invisibility hypothesis this paper addresses the need for simple tests of discrimination models that use new sources of evidence a particular model of statistical discrimination is considered with reference to its predictions concerning relative earnings variances between demographic groups calcuations using the 1980 us census data provide qualified support for the model

foreign entry and bank competition abstract foreign entry and bank competition are modeled as the interaction between asymmetrically informed principals the entrant uses collateral as a screening device to contest the incumbent s informational advantage both better information ex ante and stronger legal protection ex post are shown to facilitate the entry of low cost outside competitors into credit markets the entrant s success in gaining borrowers of higher quality by offering cheaper loans increases with its efficiency cost advantage this paper accounts for evidence suggesting that foreign banks tend to lend more to large firms thereby neglecting small and medium enterprises the results also explain why this observed bias is stronger in emerging markets

contract enforcement and investment a systematic review of the evidence summary this systematic review focuses on the empirical research that evaluates the causal link between contract enforcement and investment the evidence available in a variety of academic media reviewed with established procedures provides some but weak support for the existence of such link during 1990 2010 we only found 19 independent studies that empirically test the relationship and only one that directly examines the effects of an actual institutional reform few of the studies test alternative explanations perform robustness checks or critically assess the findings in sum the broadly accepted hypothesis of direct causation is still awaiting strong empirical backing

the legal environment banks and long run economic growth this paper examines the relationship between the legal system and banlding development and traces this connection through to long run rates of per capita gdp growth capital stock growth and productivity growth the data indicate that countries where the legal system 1 emphasizes creditor rights and 2 rigorously enforces contracts have better developed banks than countries where laws do not give a high priority to creditors and where enforcement is lax furtherrnore the exogenous component of banking development the component defined by the legal environment is positively and robustly associated with per capita growth physical capital accumulation and productivity growth this paper addresses two questions first do crosscountry differences in the legal rights of creditors the efficiency of contract enforcement and the origin of the legal system explain cross country differences in the level of banking development second do better developed banks cause faster economic development that is is the component of banking development defined by the legal environment positively associated with long run rates of economic growth capital accumulation and productivity growth examining the relationship between the legal system and banking development is valuable irrespective of issues associated with long run growth first banks may influence the level of income per capita and the magnitude of cyclical fluctuations bernanke and gertler 1989 1990 second many economists stress that understanding the evolution of legal and financial systems is essential for understanding economic development north 1981 engerman and sokoloff 1996 consequently quantitative information on the relationship between the legal environment and banks will improve our understanding of business cycles and the process of economic development furthermore examining the causal links between banks and economic growth has both conceptual and policy implications on the conceptual front a long literature debates the importance of banks in economic development starting as early as bagehot 1873 economists have argued that better banks banks that are better at identifying creditworthy firms mobilizing savings pooling risks and facilitating transactions

manufacturing growth and financial development evidence from oecd countries recent theoretical models conjecture that the development of the financial sector is essential for economic growth we investigate this hypothesis from a time series perspective and find that financial sector gdp is cointegrated for many oecd countries not so much with manufacturing gdp but mostly with manufacturing total factor productivity moreover this relation is in some instances characterized by long run causality in the sense of granger and lin however even within this homogeneous group of countries the variety of results suggests a more complex picture than is apparent from cross sectional evidence

financial inclusion gender dimension and economic impact on poor households summary we examine the question in the context of gender dimension what is the evidence of the impact of the financial inclusion programs on poor households represented by women relative to that represented by men by constructing a good counterfactual and comparison group we employ the difference in difference estimator approach with panel least squares and generalized methods of moments using standard errors for a robust analysis we notice that income growth cagr net of inflation effect was 8 40 for women as against 3 97 for men indicating that the gender of participating poor undoubtedly affects the outcomes of these programs

financial intermediation and growth some robustness results abstract we examine the relationship between financial intermediary development and economic growth using different instruments we find a strong positive effect when financial intermediation is measured as private domestic credit or liquid liabilities supporting earlier findings based on only one instrument

inflation targeting is it to blame for banking system instability abstract in light of the financial crisis the practice of inflation targeting it has been blamed for authorities failure to respond to the increase in financial systemic risk and to the development of asset bubbles however utilizing a rich database containing nearly 5500 commercial banks from 70 countries among which 22 are it for the period 1998 2012 this paper argues that on average inflation targeting national banking systems i are more stable ii possess sounder systemically important banks and iii are less distressed than or at least as distressed as other banks during periods of global liquidity shortages our results are robust to a series of tests such as when we compare countries with the same legal origins or control for the delegation of bank supervision responsibility to bodies other than the central bank overall we conclude that it cannot be blamed for contributing to financial fragility

financial development growth and the distribution of income a paradigm is presented in which both the extent of financial intermediation and the rate of economic growth are endogenously determined financial intermediation promotes growth because it allows a higher rate of return to be earned on capital and growth in turn provides the means to implement costly financial structures thus financial intermediation and economic growth are inextricably linked in accord with the goldsmith mckinnon shaw view on economic development the model also generates a development cycle reminiscent of the kuznet hypothesis in particular in the transition from a primitive slow growing economy to a developed fast growing one a nation passes through a stage in which the distribution of wealth across the rich and poor widens

job discrimination market forces and the invisibility hypothesis the invisibility hypothesis holds that the job skills of disadvantaged workers are not easily discovered by potential new employers but that promotion enhances visibility and alleviates this problem then at a competitive labor market equilibrium firms profit by hiding talented disadvantaged workers in low level jobs consequently those workers are paid less on average and promoted less often than others with the same education and ability as a result of the inefficient and discriminatory wage and promotion policies disadvantaged workers experience lower returns to investments in human capital than other workers

is full banking integration desirable abstract we analyze the links between banking integration and economic development for a sample of oecd countries we measure banking integration considering indicators that merge not only openness but also connectedness with other banking systems we plug these indicators into income regressions also controlling for other relevant variables considered by the literature in contrast to previous initiatives this second stage explicitly takes into account the differing levels of economic development of the countries in our sample since the benefits of enhanced banking integration might not be generalizable to this end we implement quantile regression also considering the presence of endogenous regressors results show that bank connectedness is more important for economic development than bank openness but the combined effect i e banking integration overall is positive and significant the quantile regression models used in the second stage show that the effects are stronger for the poorest economies

should courts enforce credit contracts strictly the intimate linkages between law and nance are currently the centre of wide rangingempirical investigations this article presents a simple banking model with informationasymmetries concerning borrowers entrepreneurial talent it is shown that improvements inthe enforcement of contract by courts reduce agency problems but can also reduce the bank sincentive to screen borrowers adequately thus worsening credit allocation a stricterenforcement of credit contracts therefore may be socially harmful even if costlessly achieved improvements in accounting standards however always make bank screening of borrowers lesscostly and improve credit allocation and social welfare

banking structure and employment growth recent studies have documented an association between financial structure and per capita income growth the relationship between financial structure and job growth by contrast is an unexplored issue of independent interest here we find that us nonmetropolitan employment grew faster in 1973 1996 where there were fewer locally owned bank offices and a more concentrated initial banking market structure these linkages were less stable in metropolitan areas in addition controlling for employment growth does not undermine the empirical linkage between initial bank structure and subsequent per capita income growth

the growth effects of property rights the role of finance summary using a variety of statistical approaches we show that the relationship between property rights and growth is nonlinear stronger enforcement of property rights raises growth up to a point before growth begins to decline we provide a simple theoretical rationale for this conclusion using a model with informational asymmetries in the financial sector stronger property rights have two opposing effects on the one hand it increases capital formation and growth on the other hand it encourages bad borrowing practices thus there exists an optimal level of property rights which maximizes growth however as financial markets mature the negative effects associated with stronger property rights become weaker

globalisation institutional reforms and financial development in east asian economies this study investigates the dynamic effects of globalisation on institutions and financial development in east asian economies using panel data tests our empirical results demonstrate that globalisation has a significant influence on institutional quality and that institutional reforms in turn facilitate and support financial development in particular the development of the banking sector in east asia globalisation is also found to have a favourable direct impact on stock market development without passing through an institutional quality channel

learning by doing and the value of optimal experimentation abstract recent research on learning by doing has provided the limit properties of beliefs and actions for a class of learning problems in which experimentation is an important aspect of optimal decision making however under these conditions the optimal policy cannot be derived analytically because bayesian learning about unknown parameters introduces a nonlinearity in the dynamic optimization problem this paper utilizes numerical methods to characterize the optimal policy function for a learning by doing problem that is general enough for practical economic applications the optimal policy is found to incorporate a substantial degree of experimentation under a wide range of initial beliefs about the unknown parameters dynamic simulations indicate that optimal experimentation dramatically improves the speed of learning and the stream of future payoffs furthermore these simulations reveal that a policy which separates control and estimation and does not incorporate experimentation frequently induces a long lasting bias in the control and target variables while these sequences tend to converge steadily under the optimal policy they frequently exhibit non stationary behavior when estimation and control are treated separately

reassessing the law finance and growth nexus after the recent great recession abstract the paper provides a reassessment of the relationship between financial structure financial development and economic growth conducting cross section and panel econometric analyses for a sample of 62 countries over 1980 2016 in line with the traditional literature we confirm the existence of a positive cross country relationship between the legal system financial development and growth even including the experience of the recent great recession in addition when jointly assessing the effect of financial structure and financial development on growth it emerges that a more bank oriented economy enjoys higher benefits in terms of long run real gdp per capita growth than a market oriented one when we consider variations across countries and over time we find that both financial structure and financial development affect growth but in an opposite way as the cross section analysis in particular when we control for their joint effect on growth we observe a positive impact of market based financial systems and a negative impact of the overall financial development we also provide evidence of the existence of a positive and significant relationship between economic growth and shadow banking during the 2002 2016 period highlighting the crucial role played by non bank financial intermediation in complementing traditional banking and in affecting the real economy

financial development and economic growth views and agenda this critique argues that the preponderance of theoretical reasoning and empirical evidence suggests a positive first order relationship between financial development and economic growth the body of work would push even most skeptics toward the belief that the development of financial markets and institutions is a critical and inextricable part of the growth process and away from the view that the financial system is an inconsequential sideshow responding passively to economic growth many gaps remain however and the paper highlights areas in acute need of additional research

regulatory incentives and the thrift crisis dividends mutual to stock conversions and financial distress during the 1980s insolvency of individual thrifts and the thrift deposit insurer created severe incentive problems lacking cash to close insolvent thrifts regulators induced nearly 10 billion of private capital to flow into the industry through mutual to stock conversions we test a theory of how regulators encouraged capitalimpaired mutual thrifts to convert by permitting them to pay dividends rather than rebuild capital we estimate the costs of this policy and interpret the 1991 federal deposit insurance corporation improvement act as requiring regulators to impose restraints on depository institutions parallel to debt covenants that prevent capital distributions by nonfinancial firms experiencing distress

law and finance at the origin what are the key determinants of financial development and growth a large literature debates the relative importance of countries legal and political environment in this paper i present evidence from ancient rome where an early form of shareholder company the societas publicanorum developed i show that the societas publicano rum flourished in a legally underdeveloped but politically supportive environment roman republic and disappeared when roman law reached its height of legal sophistication but the political environment grew less supportive roman empire in the roman case legal development appears to have mattered little as long as the law as practiced was flexible and adapted to economic needs the law as practiced in turn reflected prevalent political interests after discussing parallels in more recent history i provide a brief overview of the literature on law and finance and on politics and finance the historical evidence suggests that legal systems may be less of a technological constraint for growth than previously thought at least at the origin