On The Nonlinearity of the Finance and Growth Relation: the Role of Human Capital

Alberto Bucci (), Boubacar Diallo () and Simone Marsiglio
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Boubacar Diallo: Central Bank of Luxembourg and Qatar University

No 567, CEIS Research Paper from Tor Vergata University, CEIS

Abstract: We analyze the role that human capital plays in driving the non-monotonic relation between economic growth and financial development. At this aim we build a theoretical model of endogenous growth in which the nature of the growth and finance nexus is nonlinear and actually depends on the educational level, which ultimately determines the way through which financial development affects both the productivity and the depreciation of human capital. The dependence of the non-monotonic (i.e., bell-shaped) growth and finance nexus on human capital suggests that there may exist a threshold education level beyond which the sign of the relation changes. We econometrically test such a theoretical prediction in a rich and large data set comprising a cross-section of 133 countries over the period 1970-2011. We rely on the GMM instrumental variable approach to address endogeneity issues, and we consider a large number of control variables. After performing a number of robustness checks, all our results are consistent with the view that human capital helps to explain the nonlinear relationship between finance and growth. In particular, we find support for our theoretical model’s conclusion that financial development may be harmful to economic growth in countries that already have high levels of education, while it may be beneficial in those countries in which human capital is less abundant.

Keywords: Economic Growth; Financial Development; Human Capital (search for similar items in EconPapers)
JEL-codes: G00 G10 O40 O41 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2023-11-20, Revised 2023-11-20
New Economics Papers: this item is included in nep-edu, nep-fdg and nep-gro
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