On The Nonlinearity of the Finance and Growth Relation: the Role of Human Capital

32 Pages Posted: 28 Nov 2023

See all articles by Alberto Bucci

Alberto Bucci

University of Milan - Department of Business Policy and Economics

Boubacar Diallo

Qatar University - College of Business and Economics

Simone Marsiglio

University of Pisa

Date Written: November 20, 2023

Abstract

We analyze the role that human capital plays in driving the non-monotonic relation between economic growth and financial development. At this aim we build a theoretical model of endogenous growth in which the nature of the growth and finance nexus is nonlinear and actually depends on the educational level, which ultimately determines the way through which financial development affects both the productivity and the depreciation of human capital. The dependence of the non-monotonic (i.e., bell-shaped) growth and finance nexus on human capital suggests that there may exist a threshold education level beyond which the sign of the relation changes. We econometrically test such a theoretical prediction in a rich and large data set comprising a cross-section of 133 countries over the period 1970-2011. We rely on the GMM instrumental variable approach to address endogeneity issues, and we consider a large number of control variables. After performing a number of robustness checks, all our results are consistent with the view that human capital helps to explain the nonlinear relationship between finance and growth. In particular, we find support for our theoretical model’s conclusion that financial development may be harmful to economic growth in countries that already have high levels of education, while it may be beneficial in those countries in which human capital is less abundant.

Keywords: Economic Growth, Financial Development, Human Capital

JEL Classification: G00, G10, O40, O41

Suggested Citation

Bucci, Alberto and Diallo, Boubacar and Marsiglio, Simone, On The Nonlinearity of the Finance and Growth Relation: the Role of Human Capital (November 20, 2023). CEIS Working Paper No. 567, Available at SSRN: https://ssrn.com/abstract=4638928 or http://dx.doi.org/10.2139/ssrn.4638928

Alberto Bucci (Contact Author)

University of Milan - Department of Business Policy and Economics ( email )

Via Mercalli, 23
20122-Milano
Italy
+39(0)2 50321.463 (Phone)
+39(0)2 50321.505 (Fax)

Boubacar Diallo

Qatar University - College of Business and Economics ( email )

2713 Doha
Qatar

Simone Marsiglio

University of Pisa ( email )

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
42
Abstract Views
159
PlumX Metrics