A reassessment of intermediation and size effects of financial systems

Simon Sturn and Klara Zwickl ()
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Klara Zwickl: Vienna University of Economics and Business

Empirical Economics, 2016, vol. 50, issue 4, No 14, 1467-1480

Abstract: Abstract Several recent studies on the finance–growth nexus highlight that too much financial development, as it has been established in many advanced economies, harms growth. Beck et al. (J Financ Stab 10:50–64, 2014) criticize this literature for only focusing on intermediation activities of financial systems, even though financial sectors in advanced countries have extended their scope beyond traditional tasks. In line with this argument, Beck et al. find for a panel of high-income countries that financial sector size and non-intermediation activity stimulate growth, while intermediation activity has no effect. However, they focus only on OLS regressions with a very limited number of control variables. We test for the robustness of these results. Our findings show that they depend on outliers and are not robust against alternative specifications or estimation approaches. Further, a big financial sector and too many non-intermediation activities are found to reduce growth in some specifications. Our results suggest that Beck et al.’s criticism of the “too much finance” literature is grounded on thin empirical evidence.

Keywords: Financial intermediation; Financial sector size; Finance–growth nexus; Too much finance; Robustness (search for similar items in EconPapers)
JEL-codes: G10 G21 O16 O40 (search for similar items in EconPapers)
Date: 2016
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DOI: 10.1007/s00181-015-0979-y

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