Banking and Growth: Evidence From a Regression Discontinuity Analysis

Abstract

This paper investigates the link between banking system expansion and economic growth. Contrary to evidence from the United States, several recent microeconomic studies from developing country settings do not find enduring effects of banking that carry over to the medium or long term. The paper looks at the exogenous expansion of bank branches in India, driven by a previously unstudied policy reform from 2005. Iterating a regression discontinuity design, it traces branch growth before and after the reform along with responses from the real economy. The paper finds that the expansion of financial intermediation led to positive outcomes in both agriculture and manufacturing, and growth in local GDP.

Keywords: banking, growth, regression discontinuity, India

JEL Classification: G21, G28, L13, O12, O16