What determines the finance-growth nexus? An endogenous growth model and empirical evidence

Michael Graff and Alexander Karmann

No 15/03, Dresden Discussion Paper Series in Economics from Technische Universität Dresden, Faculty of Business and Economics, Department of Economics

Abstract: An endogenous growth model with a financial sector is formulated, and empirical analyses are conducted. The model exhibits structural shifts and breaks caused by institutional change, suggesting that a linear approach is inadequate. To address this point empirically, we fit data for 90 countries from 1960-2000 to a standard growth equation with a proxy for financial activity. Firstly, it is shown that a growth enhancing outcome of financial activity is contingent on a sound institutional framework. Then, we order the sample by control variables which follow from the model as potential causes of breaks in the adjustment process. Threshold regressions reveal non-linearity that is consistent with the model. Most importantly, we find signs for excessive financial activity.

Keywords: Financial Development; Endogenous Growth; Institutions; Non-linearities (search for similar items in EconPapers)
JEL-codes: O16 O42 O57 (search for similar items in EconPapers)
Date: 2003
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Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:zbw:tuddps:1503

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