Financial Intermediation and Growth: Causality and Causes

Abstract

Legal and accounting reform that strengthens creditor rights, contract enforcement, and accounting practices boosts financial development and accelerates economic growth.

Levine, Loayza, and Beck evaluate:

Whether the level of development of financial intermediaries exerts a casual influence on economic growth.

Whether cross-country differences in legal and accounting systems (such as creditor rights, contract enforcement, and accounting standards) explain differences in the level of financial development.

Using both traditional cross-section, instrumental-variable procedures and recent dynamic panel techniques, they find that development of financial intermediaries exerts a large causal impact on growth.

The data also show that cross-country differences in legal and accounting systems help determine differences in financial development.

Together, these findings suggest that legal and accounting reform that strengthens creditor rights, contract enforcement, and accounting practices boosts financial development and accelerates economic growth.

This paper - a product of Macroeconomics and Growth, Development Research Group - is part of a larger effort in the group to understand the links between the financial system and economic growth. Thorsten Beck may be contacted at [e-mail].

JEL Classification: O16, O40, G28