Connection between Financial Sector and Economic Growth at High Levels of Financial Development

Anton Gerunov

Economic Studies journal, 2014, issue 2, 39-68

Abstract: Research on the finance-growth nexus over the last two decades has established a positive and stable link between financial development and economic growth, whereby the financial system supports the real economy through allocation of capital, risk management and productive innovation. On the other hand we should also heed the possibility of decreasing marginal returns due to large debt expositions. This article tests whether the positive effect of finance is observable at high levels of financial development. Data on the 27 member states of the European Union over a period of 12 years is empirically tested using panel regressions. Results show that overly extended financial systems exhibit decreasing returns to scale and can even exert a small but statistically significant negative effect on grow?h. The benevolent effects of financial development overshadow potential risks but financial systems nevertheless need to be subject to judicious regulation.

JEL-codes: E44 O40 (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:bas:econst:y:2014:i:2:p:39-68

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