Does Institutional Diversification of the Financial System Promote Economic Growth?
Posted: 30 Aug 2011 Last revised: 15 May 2015
Date Written: August 25, 2011
This paper revisits the link between finance and growth and proposes a new comprehensive measure of financial development that captures the overall structure of the financial sector and its degree of institutional diversification (ID). We document a significant link between this new measure and real GDP per capita growth. Countries with more diversified financial system structures tend to experience faster growth than countries with lower levels of institutional diversification. The ID measure remains statistically and economically significant across various model specifications and even after controlling for the standard financial development indicators, such as private credits by banks, whose significance for growth seems to be weakening over more recent time periods.
Keywords: Financial System Structure, Economic Growth, Financial Development, Panel Data
JEL Classification: G15; G21 ; O16
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