The Impact of Financial Crises on the Finance–Growth Relationship: A European Perspective

22 Pages Posted: 6 Oct 2016

See all articles by Lucia Fasiangova

Lucia Fasiangova

Vienna University of Economics and Business

Hannes Juvan

Vienna University of Economics and Business

Bernhard Mahlberg

Vienna University of Economics and Business - Institute for Production Management; Institute for Industrial Research

Date Written: November 2016

Abstract

Rousseau and Wachtel (2011) (Rousseau, P., Wachtel, P., 2011, ‘What is Happening to the Impact of Financial Deepening on Economic Growth?’ Economic Inquiry, 49(1), pp. 276–288) find a weakening effect of bank finance on growth for more recent periods in replicating King and Levine ([R. G. King, 1993]) (King, R. G., Levine, R., 1993, ‘Finance and Growth: Schumpeter Might Be Right’, The Quarterly Journal of Economics, 108, pp. 717–737) in a heterogeneous sample up to 2004. We contribute by re‐examining this finding for a focused set of 26 European countries up to 2009. In the second step, we introduce an aggregated finance variable into the model which accounts for aggregate credit, bond and stock markets. We reconfirm a weakening effect of finance on growth, which is persistent even when dummy variables are added to control for financial crises. The development of European financial markets seems to have not only decoupled from the real sector but also to exert an inverted impact on growth. We attribute our finding to structural change between bank‐ and market‐driven setup, threshold effects and the procyclical nature of financial markets.

Suggested Citation

Fasiangova, Lucia and Juvan, Hannes and Mahlberg, Bernhard, The Impact of Financial Crises on the Finance–Growth Relationship: A European Perspective (November 2016). Economic Notes, Vol. 45, Issue 3, pp. 423-444, 2016, Available at SSRN: https://ssrn.com/abstract=2848589 or http://dx.doi.org/10.1111/ecno.12067

Lucia Fasiangova (Contact Author)

Vienna University of Economics and Business ( email )

Hannes Juvan

Vienna University of Economics and Business ( email )

Bernhard Mahlberg

Vienna University of Economics and Business - Institute for Production Management ( email )

Welthandelsplatz 1
Vienna, Wien 1020
Austria

HOME PAGE: http://https://www.wu.ac.at/en/prodmanengl/

Institute for Industrial Research ( email )

Mittersteig 10/4
Vienna, 1050
Austria

HOME PAGE: http://https://iwi.ac.at/

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