The causal effects of the darker side of financial development

Rachel Cho, Rodolphe Desbordes and Markus Eberhardt

No 2022-04, Discussion Papers from University of Nottingham, GEP

Abstract: We study the causal implications of financial deepening for economic development and financial crises, adopting a heterogeneous difference-in-difference framework. Using cross-country data for the past six decades we demonstrate that very high levels of finance, proxied by credit/GDP, are neither associated with lower long-run growth nor with higher short-run propensity of banking crises due to ‘credit booms gone bust’ cycles or unfettered capital inflows. When we investigate ‘too much finance’ at intermediate levels of credit/GDP we find increased crisis propensity due to capital inflows and commodity price movements, but, again, no detrimental long-run growth effects for these (emerging) economies.

Keywords: financial development; economic growth; financial crises; difference-in-difference; interactive fixed effects; heterogeneous treatment effects (search for similar items in EconPapers)
Date: 2022
New Economics Papers: this item is included in nep-ban, nep-fdg, nep-gro and nep-his
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Persistent link: https://EconPapers.repec.org/RePEc:not:notgep:2022-04

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