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Two faces of financial systems: Provision of services versus shock-smoothing

Dmitri Vinogradov and Yousef Makhlouf

Journal of International Financial Markets, Institutions and Money, 2021, vol. 75, issue C

Abstract: Banks and financial markets contribute to economic growth directly – by providing information, liquidity and other services to investors and borrowers, and indirectly – by dampening the impact of exogenous shocks on growth. Do banks and markets perform equally well in both? Our panel of 44 developing and 29 developed countries in 1975–2017 demonstrates significance of only the service channel in advanced economies: they perform better if they are market-based. In less developed economies financial structure has no direct relevance for growth but offers shock-smoothing advantages through banks; market trading activity makes shocks absorbed faster and transmitted to the real sector quicker.

Keywords: Financial structure; Bank-based; Market-based; Intertemporal smoothing; Exogenous shocks (search for similar items in EconPapers)
JEL-codes: E44 G21 O16 (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1016/j.intfin.2021.101456

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Journal of International Financial Markets, Institutions and Money is currently edited by I. Mathur and C. J. Neely

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