Financial System Components - Substitutes or Complements?

Abstract:     
Prior studies have examined the development of the financial system and its impact on economic growth, but little has been said about the relationship between its four major components: banking, the stock market, the bond market (private and public bond) and insurance (life and nonlife). Using a dynamic panel of 106 countries over the period 1980-2007, we use the GMM (generalized-method-of-moments) system estimator to observe the pair-wise relationships between these components. Our findings show a high level of interdependence. When evaluated at the average level of each component’s development, the majority of the pair-wise relationships reveal that one component will act as a substitute for the other. This should be taken into consideration for policies relating to growth in the financial sector.

Number of Pages in PDF File: 37

working papers series