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
There are 2 versions of this paper
Is More Finance Better? Disentangling Intermediation and Size Effects of Financial Systems
Is More Finance Better? Disentangling Intermediation and Size Effects of Financial Systems
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: Suggested Citation
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