Finance and the Sources of Growth
38 Pages Posted: 20 Apr 2016
Date Written: February 1999
Abstract
Development of the banking sector exerts a large, causal impact on total factor productivity growth, which in turn causes GDP to grow. Whether banking development has a long-run effect on capital growth or private saving remains to be seen.
Beck, Levine, and Loayza evaluate whether the level of development in the banking sector exerts a causal impact on economic growth and its sources- total factor productivity growth, physical capital accumulation, and private saving.
They use (1) a pure cross-country instrumental variable estimator to extract the exogenous component of banking development and (2) a new panel technique that controls for country-specific effects and endogeneity. They find that:
- Banks do exert a large, causal impact on total factor productivity growth, which feeds through to overall GDP growth. - The long-run links between banking development and both capital growth and private savings are more tenuous.
This paper - a product of Finance, Development Research Group - is part of a larger effort in the group to understand the links between the financial system and economic growth.
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