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The non‐linearity between finance and economic growth: a literature review and evidence from China

Guangdong Xu and Binwei Gui

Asian-Pacific Economic Literature, 2021, vol. 35, issue 1, 3-18

Abstract: The influence of finance on the economy has been shown to be non‐linear. When financial development exceeds the needs of the real sector, an economy will face the challenge of ‘too much finance’, which may generate problems such as rent‐seeking, asset price bubbles, or even financial crises. China seems to have followed the ‘too much finance’ pattern in the most recent decade, during which a fast‐expanding financial sector and a slowly growing economy coexisted. The empirical part of this study supports a non‐linear (S‐shaped) relationship between financial development and GDP per capita; in addition, the two financial development indicators used (total loans and private credit) appear to have opposite effects on economic growth.

Date: 2021
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