State dependence in the finance-growth nexus: A functional coefficient approach

Helmut Herwartz and Yabibal Walle

No 156, University of Göttingen Working Papers in Economics from University of Goettingen, Department of Economics

Abstract: Noting that 'one size does not fit all' in the case of the finance-growth (FG) nexus, a growing body of literature has recently focused on uncovering economic conditions under which financial development could be beneficial (detrimental) to economic development. We look into these conditions by means of a flexible semiparametric approach which allows the long-run FG nexus to depend on measurable economic states. Using annual data for 74 economies spanning the period 1975-2005, we find that the level of financial development shows a strong positive impact on the FG nexus. Moreover, although the impact of finance on growth is generally higher in high-income economies, allowing for intra-group variations reveals scenarios where the impact could be higher in low-income economies. However, the FG link could also be negative if low- and lower-middle-income economies have very large governments or are extremely open to international trade.

Keywords: finance-growth nexus; financial development; economic growth; functional coefficient model (search for similar items in EconPapers)
JEL-codes: C14 C33 G28 O16 (search for similar items in EconPapers)
Date: 2013
New Economics Papers: this item is included in nep-fdg and nep-pbe
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Related works:
Journal Article: Determinants of the link between financial and economic development: Evidence from a functional coefficient model (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:cegedp:156

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