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Is There an Optimum Level of Financial Activity?

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Abstract

This paper addresses the notion of an "optimum level of financial activity" that is contingent on a country's general level of development. Referring to threshold regressions and a bootstrap test for structural shift of the finance regressor in a growth equation, it is shown that countries gain less from a given level of financial activity, if the latter fails to keep up with or exceeds what would follow from a balanced expansion path. The paper contributes to the literature on the finance-growth nexus in providing empirical support for the notion of "balanced" financial development with a development specific optimum level of financial activity.

Suggested Citation

  • Michael Graff, 2005. "Is There an Optimum Level of Financial Activity?," KOF Working papers 05-106, KOF Swiss Economic Institute, ETH Zurich.
    • Handle: RePEc:kof:wpskof:05-106
    DOI: 10.3929/ethz-a-005104837
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    Cited by:

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    Keywords

    Optimum financial activity; Bayesian statistics; Bootstrapping;
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