What Matters in the Finance-Growth Nexus of Advanced Economies? Evidence from OECD Countries

38 Pages Posted: 29 May 2017

See all articles by Marc Steffen Rapp

Marc Steffen Rapp

University of Marburg - School of Business & Economics; University of Marburg - Marburg Centre for Institutional Economics (MACIE)

Iuliia Udoieva

University of Marburg - School of Business & Economics

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Date Written: May 29, 2017

Abstract

Over the last decades a large strand of finance and growth literature has provided ample evidence on the importance of financial deepening for economic development. Yet, recently, the focus of public debate has shifted towards the role of the financial system structure, an area in which empirical research remains relatively sparse and exploratory in nature. With this paper, we aim to contribute to that debate by analyzing the role the financial system structure plays in economic growth and risk. Focusing on stock markets and studying OECD economies over 1994-2013, we find that, ceteris paribus, financial systems with relatively larger stock markets facilitate economic growth and dampen economic risk. Our findings remain robust under application of instrumental variable and system generalized method of moments estimators, as well as when we use an alternative definition of stock market development, estimate median regressions, examine relatively high-frequency annual data, control for systemic banking crises or apply quadratic specifications. We find no such effect for private bond markets or private credit volume. Overall, our results suggest that financial system structure matters for the economic development of advanced economies and highlight the importance of a debate about the optimal structure of an economy’s financial system.

Original paper available at: https://ssrn.com/abstract=2813587

Keywords: finance, financial development, stock market, economic development, growth, risk

JEL Classification: E44, G10, O40

Suggested Citation

Rapp, Marc Steffen and Udoieva, Iuliia, What Matters in the Finance-Growth Nexus of Advanced Economies? Evidence from OECD Countries (May 29, 2017). Applied Economics, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2976237

Marc Steffen Rapp (Contact Author)

University of Marburg - School of Business & Economics ( email )

Am Plan 2
Marburg, D-35037
Germany

University of Marburg - Marburg Centre for Institutional Economics (MACIE) ( email )

Am Plan
Marburg, 35032
Germany

Iuliia Udoieva

University of Marburg - School of Business & Economics ( email )

Am Plan 2
Marburg, D-35037
Germany

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