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Non-linearity in the finance-growth nexus: Evidence from Indonesia

Wahyoe Soedarmono, Iftekhar Hasan () and Nuruzzaman Arsyad

International Economics, 2017, vol. 150, issue C, 19-35

Abstract: This paper investigates the finance-growth nexus where bank credit is decomposed into investment, consumption, and working capital credit. From a panel dataset of provinces in Indonesia, it documents that higher financial development measured by financial deepening and financial intermediation exhibits an inverted U-shaped relationship with economic growth. This non-linear effect of financial deepening is driven by both investment credit and consumption credit. These results suggest that too much investment credit and, to a lesser extent, consumption credit are detrimental to economic growth. Ultimately, only financial intermediation associated with working capital credit has a positive and monotonic impact on economic growth.

Keywords: Financial deepening; Financial intermediation; Bank credit decomposition; Regional economic growth (search for similar items in EconPapers)
JEL-codes: G20 O16 O40 (search for similar items in EconPapers)
Date: 2017
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