Finance for Growth: Does a Balanced Financial Structure Matter?

Alicia Garcia-Herrero and Lucia Cuadro-Saez
Authors registered in the RePEc Author Service: Alicia Garcia Herrero and Lucía Cuadro Sáez

No 503, Working Papers from BBVA Bank, Economic Research Department

Abstract: In this paper we explore empirically a long-standing question in the literature on finance for growth, namely whether the financial structure in terms of the size of the banking system relative to the capital markets matters for economic growth. We build upon the existing literature by constructing a new measure of the balancedness of the financial structure which is broader, as it includes the domestic bond market as well as external sources of financing. It is also bounded and more linear than existing ones. We find that a more balanced financial structure in terms of the size of banks relative to the capital markets is associated with higher economic growth. Such finding points to banks and capital markets being more of a complement than a substitute. This is in line with Greenspan s idea of one market serving as spare wheel of the other.

JEL-codes: G15 G21 O16 (search for similar items in EconPapers)
Pages: 26 pages
Date: 2005-06
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Journal Article: Finance for Growth. Does a Balanced Financial Structure Matter? (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:bbv:wpaper:0503

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