The finance-growth nexus: The role of banks

Thiago Silva (), Benjamin Tabak and Marcela Tetzner Laiz

Economic Systems, 2021, vol. 45, issue 1

Abstract: We contribute to the finance-growth nexus literature by showing that credit origin, bank ownership, type of credit, and bank type matter in economic growth. We use a unique dataset covering 5555 cities in Brazil, with granular information on credit characteristics. We find that non-earmarked credit to the corporate sector is associated with municipal economic growth more strongly than earmarked credit, despite the increase in the relevance of the latter after the global financial crisis. We also find that the type of credit—whether the loans are general purpose or for a specific purpose—is associated with economic growth in different ways. Overall, credit provided to the corporate sector by domestic private banks is correlated with higher economic growth rates. In contrast, the relationship between credit from state-owned banks and economic growth becomes statistically significant only after the crisis. Although we follow the finance-growth literature in our empirical exercises using internal instruments in generalized method of moments (GMM) estimations, we also conduct robustness tests using two additional external instruments: the number of complaints filed against each bank and local credit accessibility. Our findings with external instruments are the same with respect to the use of traditional internal instruments in GMM estimations.

Keywords: Banking system; Economic growth; Financial development; Finance-growth nexus; GMM (search for similar items in EconPapers)
JEL-codes: C10 F15 F18 G21 G32 O47 (search for similar items in EconPapers)
Date: 2021
References: Add references at CitEc
Citations: View citations in EconPapers (6)

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Working Paper: The Finance-Growth Nexus: the role of banks (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecosys:v:45:y:2021:i:1:s0939362520300698

DOI: 10.1016/j.ecosys.2020.100762

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