Financial development and growth in European regions

Paola Rossi and Diego Scalise ()

No 1246, Temi di discussione (Economic working papers) from Bank of Italy, Economic Research and International Relations Area

Abstract: In this paper we study the relationship between financial development and economic growth across European regions, exploiting the within-country variability of our data. First, we collect a number of indicators to capture the financial structure for each of the 110 EU27 regions. Then, the multiplicity of indicators (the number of bank branches, the presence of bank headquarters, the value added by the financial sector and the presence of a stock exchange) is decreased through a principal component analysis to show summary measures capturing the capillarity of bank branches and the agglomeration and complexity of the financial industry at large. In order to establish a causal nexus, we control for country fixed effects and we instrument financial variables. We use two instruments derived from the historical religious affiliations across European regions: the presence of Protestant communities in the 16th century (the Peace of Augsburg in 1555 allocated each region within the Holy Roman Empire to a different faith according the Prince’s religion) and the presence of Jewish communities in the 18th century. Our estimates point to a positive nexus between financial development and economic growth, showing that what matters most is the presence of a complex and diversified financial sector rather than the capillarity of bank branches.

Keywords: growth; financial development; European Regions (search for similar items in EconPapers)
JEL-codes: E44 O16 R11 (search for similar items in EconPapers)
Date: 2019-11
New Economics Papers: this item is included in nep-fdg, nep-his and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Journal Article: Financial development and growth in European regions (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:bdi:wptemi:td_1246_19

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