Too Cold, Too Hot, or Just Right? Assessing Financial Sector Development Across the Globe

31 Pages Posted: 24 Apr 2013

See all articles by Adolfo Barajas

Adolfo Barajas

International Monetary Fund (IMF) - Western Hemisphere Department

Thorsten Beck

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

Era Dabla-Norris

International Monetary Fund (IMF)

Seyed Reza Yousefi

International Monetary Fund (IMF)

Date Written: March 2013

Abstract

This paper introduces the concept of the financial possibility frontier as a constrained optimum level of financial development to gauge the relative performance of financial systems across the globe. This frontier takes into account structural country characteristics, institutional, and macroeconomic factors that impact financial system deepening. We operationalize this framework using a benchmarking exercise, which relates the difference between the actual level of financial development and the level predicted by structural characteristics, to an array of policy variables. We also show that an overshooting of the financial system significantly beyond levels predicted by its structural fundamentals is associated with credit booms and busts.

Keywords: Financial systems, Financial sector, Banks, Cross country analysis, Financial Development, Financial Sector Policies, Benchmarking, financial system, financial reform, stock market, financial services, stock market capitalization, banking, financial institutions, financial markets, macroeconomic stability, financial reforms, stock markets, stock market turnover, bank entry, financial economics, bond, financial instability, bonds, stock market development, financial cycles, financial sector development, banking sector, financial innovation, financial intermediaries, banking crises, bank deposits, financial intermediation, banking supervision, government bond, international capital, financial

JEL Classification: E44, E52, F60, G20, O16

Suggested Citation

Barajas, Adolfo and Beck, Thorsten and Dabla-Norris, Era and Yousefi, Seyed Reza, Too Cold, Too Hot, or Just Right? Assessing Financial Sector Development Across the Globe (March 2013). IMF Working Paper No. 13/81. Available at SSRN: https://ssrn.com/abstract=2255874

Adolfo Barajas

International Monetary Fund (IMF) - Western Hemisphere Department ( email )

700 19th Street NW
Washington, DC 20431
United States
202-623-4152 (Phone)
202-623-6070 (Fax)

Thorsten Beck

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

Era Dabla-Norris

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States

Seyed Reza Yousefi

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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