State Dependence in the Finance-growth Nexus: A Functional Coefficient Approach

32 Pages Posted: 3 Jul 2013

See all articles by Helmut Herwartz

Helmut Herwartz

University of Goettingen (Gottingen)

Yabibal Mulualem Walle

University of Goettingen (Gottingen)

Date Written: July 2, 2013

Abstract

Noting that "one size does not fit all" in the case of the finance-growth (FG) nexus, a growing body of literature has recently focused on uncovering economic conditions under which financial development could be beneficial (detrimental) to economic development. We look into these conditions by means of a flexible semiparametric approach which allows the long-run FG nexus to depend on measurable economic states. Using annual data for 74 economies spanning the period 1975-2005, we find that the level of financial development shows a strong positive impact on the FG nexus. Moreover, although the impact of finance on growth is generally higher in high-income economies, allowing for intra-group variations reveals scenarios where the impact could be higher in low-income economies. However, the FG link could also be negative if low- and lower-middle-income economies have very large governments or are extremely open to international trade.

Keywords: Finance-growth nexus, financial development, economic growth, functional coeffient model

JEL Classification: C14, C33, O16, G28

Suggested Citation

Herwartz, Helmut and Walle, Yabibal Mulualem, State Dependence in the Finance-growth Nexus: A Functional Coefficient Approach (July 2, 2013). Available at SSRN: https://ssrn.com/abstract=2288784 or http://dx.doi.org/10.2139/ssrn.2288784

Helmut Herwartz (Contact Author)

University of Goettingen (Gottingen) ( email )

Platz der Gottinger Sieben 3
Gottingen, D-37073
Germany

Yabibal Mulualem Walle

University of Goettingen (Gottingen) ( email )

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