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Too much finance or too many weak instruments?

Maxime Fajeau

International Economics, 2021, vol. 165, issue C, 14-36

Abstract: Since the global financial crisis of 2008, a strand of the literature has documented a threshold beyond which financial development tends to affect growth adversely. However, the The evidence rests heavily on internal instrument identification strategies, whose reliability has received surprisingly little attention so far in the finance-growth literature. Therefore, the present paper conducts a reappraisal of the non-linear conclusion twofold. First, in light of new data, second, by a thorough assessment of the identification strategy. Evidence points out that a series of unaddressed issues affecting the system-gmm setup results in spurious threshold regressions and overfitting of outliers.

Keywords: Finance; Growth; Non-linearity; System GMM; Panel data (search for similar items in EconPapers)
JEL-codes: C52 E44 G1 O11 O16 (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1016/j.inteco.2020.10.003

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