The finance-growth nexus over the long-run

Krystian Bua, Giovanni Dosi and Maria Enrica Virgillito

LEM Papers Series from Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy

Abstract: This paper studies the finance-growth nexus in historical perspective. We employ a panel data model with interactive fixed effects and time-varying coefficients for a sample of advanced economies since the late 19th century. The model considers flexible specifications of heterogeneity and accounts for global common shocks that have likely shaped the finance-growth nexus over time. We present three main sets of results. First, our empirical analysis shows that the relationship between finance and growth is time-varying. Using our benchmark model, we estimate the time-varying slope coefficient of financial development and show that the finance-growth nexus has secularly evolved, thus challenging the mainstream assumption of a uniform association over time. Second, by accounting for global common shocks and their heterogeneous impact, we challenge the dominant narrative suggesting a consistently positive contemporaneous relationship between financial development and economic growth. Third, differences emerge when we distinguish between Schumpeterian finance (bank credit growth) and a more speculative type of finance (stock market growth). While both exhibit time-varying behaviors, the empirical evidence points to a substantially stronger and positive association between bank credit growth and economic growth, as opposed to stock markets, which tend to display a weaker or even negative relationship. Our results remain robust when we account for a range of alternative specifications and potential sources of variation.

Keywords: Finance-growth nexus; Financial development; Economic growth; Semiparametric methods; Time-varying estimates; Long-panel (search for similar items in EconPapers)
Date: 2025-07-11
New Economics Papers: this item is included in nep-fdg and nep-his
References: Add references at CitEc
Citations:

Downloads: (external link)
http://www.lem.sssup.it/WPLem/files/2025-24.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ssa:lemwps:2025/24

Access Statistics for this paper

More papers in LEM Papers Series from Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy Contact information at EDIRC.
Bibliographic data for series maintained by ( this e-mail address is bad, please contact ).