Is More Finance Better? Disentangling Intermediation and Size Effects of Financial Systems

European Banking Center Discussion Paper No. 2012-016

CentER Disucssion Paper Series No. 2012-060

39 Pages Posted: 24 Jul 2012

See all articles by Thorsten Beck

Thorsten Beck

City University London - Sir John Cass Business School; Tilburg University - European Banking Center, CentER

Hans Degryse

KU Leuven, Department Accounting, Finance and Insurance; Centre for Economic Policy Research (CEPR)

Christiane Kneer

Tilburg University

Multiple version iconThere are 2 versions of this paper

Date Written: July 24, 2012

Abstract

Financial systems all over the world have grown dramatically over recent decades. But is more finance necessarily better? And what concept of finance – the size of the financial sector, including both intermediation and other auxiliary 'non-intermediation' activities, or a focus on traditional intermediation activity – is relevant for its impact on real sector outcomes? This paper assesses the relationship between the size of the financial system and the degree of intermediation, on the one hand, and GDP per capita growth and growth volatility, on the other hand. Based on a sample of 77 countries for the period 1980-2007, we find that intermediation activities increase growth and reduce volatility in the long run. An expansion of the financial sectors along other dimensions has no long-run effect on real sector outcomes. Over shorter time horizons a large financial sector stimulates growth at the cost of higher volatility in high-income countries. Intermediation activities stabilize the economy in the medium run especially in low-income countries.

Keywords: financial intermediation, economic growth, growth volatility

JEL Classification: G2, O4

Suggested Citation

Beck, Thorsten and Degryse, Hans and Kneer, Christiane, Is More Finance Better? Disentangling Intermediation and Size Effects of Financial Systems (July 24, 2012). European Banking Center Discussion Paper No. 2012-016. Available at SSRN: https://ssrn.com/abstract=2116106 or http://dx.doi.org/10.2139/ssrn.2116106

Thorsten Beck (Contact Author)

City University London - Sir John Cass Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom

Tilburg University - European Banking Center, CentER ( email )

PO Box 90153
Tilburg, 5000 LE
Netherlands

Hans Degryse

KU Leuven, Department Accounting, Finance and Insurance ( email )

Naamsestraat 69
Leuven, B-3000
Belgium

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Christiane Kneer

Tilburg University ( email )

P.O. Box 90153
Tilburg, DC Noord-Brabant 5000 LE
Netherlands

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