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The Finance-Growth Nexus: the role of banks

Thiago Silva (), Benjamin Tabak () and Marcela Laiz

No 506, Working Papers Series from Central Bank of Brazil, Research Department

Abstract: We contribute to the finance-growth nexus literature by showing that credit origin, bank ownership, credit modality and bank type matter for economic growth. We use a unique dataset covering 5,555 municipalities in the Brazilian economy with granular information on credit characteristics. We find that non-earmarked credit to the corporate sector associates with municipal economic growth more strongly than earmarked credit, despite the increase in relevance of the latter after the global financial crisis. We also find that the credit modality---whether it is general purpose or purpose-specific loans---associates with economic growth in different ways. Overall, credit provided by domestic private banks to the corporate sector correlates with higher economic growth rates. In contrast, only after the crisis the relationship between credit from state-owned banks and economic growth becomes statistically significant. While we follow the finance-growth literature in our empirical exercises using internal instruments in GMM estimations, we also provide robustness tests using two additional external instruments: the number of complaints filed against each bank and the local credit accessibility. Our results with external instruments indicate the same findings with respect to the use of traditional internal instruments in GMM estimations.

New Economics Papers: this item is included in nep-ban and nep-fdg
Date: 2019-09
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