Does Financial Activity Cause Economic Growth?

Dresden Working Papers in Economics No. 2/2001

23 Pages Posted: 6 Feb 2001

See all articles by Michael Graff

Michael Graff

ETH Zurich

Alexander Karmann

Dresden University of Technology - Faculty of Economics and Business Management

Date Written: February 1, 2001

Abstract

To clarify the causal links between financial activity and economic growth, three theoretical models are analyzed and a LISREL structural equation path model is estimated. In the modeling part, poverty traps result from large fixed costs or high proportions of real investment to run a financial sector. Human capital allocated to financial activities will improve long-run levels but may reduce growth rates in the short run. Empirically, based on data for 93 countries during the 1980-90 period, it is shown that during the 1980s finance was predominantly a supply-leading determinant of economic growth. Our analysis suggests, however, that this general finding cannot be confirmed for the less developed countries, thereby giving some support to the conclusions derived from the theoretical modeling.

JEL Classification: E20, O16, O42

Suggested Citation

Graff, Michael and Karmann, Alexander J., Does Financial Activity Cause Economic Growth? (February 1, 2001). Dresden Working Papers in Economics No. 2/2001. Available at SSRN: https://ssrn.com/abstract=258931 or http://dx.doi.org/10.2139/ssrn.258931

Michael Graff (Contact Author)

ETH Zurich ( email )

KOF Swiss Economic Institute
Leonhardstrasse 21
CH-8092 Zurich, 8092
Switzerland

Alexander J. Karmann

Dresden University of Technology - Faculty of Economics and Business Management ( email )

Mommsenstrasse 13
Dresden, D-01062
Germany

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