Finance and Sources of Growth: Evidence from the U.S. States
"Finance and sources of growth: evidence from the U.S. states," JOURNAL OF ECONOMIC GROWTH, vol. 22(1), pages 97-122, March 2017.
40 Pages Posted: 13 Jun 2019
Date Written: August 16, 2016
Does financial development affect economic growth through its impact on the accumulation of capital inputs or by boosting total factor productivity growth? We use a new data set on output, physical, and human capital inputs for the U.S. states to study this question. Unlike previous cross-country research that tries to disentangle the channels through which financial development impacts growth, we use a plausibly exogenous measure of financial development: the timing of banking deregulation across states during the period 1970-2000. At the same time, our new data set allows us to go beyond what was previously done in the state banking deregulation literature and identify whether finance impacts states' input accumulation or TFP growth. We find, in line with existing cross-country studies, that deregulation boosts growth by accelerating both TFP growth and the accumulation of physical capital without having any impact on human capital. In contrast to the cross-country studies, we also find that the effects of deregulation are largely independent of states' initial level of development; both rich and poor states grow faster after deregulation. Additionally, since our data set breaks down aggregate output into three sectors: agriculture, manufacturing, and the remaining industries, we are able to show that deregulation accelerates the growth of productivity in manufacturing. This last finding answers an important critique of the banking deregulation studies which asserts that observed growth effects may be coming from the growth of the financial industry itself and not from the beneficial effect of finance on other industries, such as manufacturing.
Keywords: Economic growth, Financial development, Banking deregulation, TFP growth, Capital accumulation
JEL Classification: O11, O16, O47, G28, E23
Suggested Citation: Suggested Citation