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The vanishing effect of finance on growth

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  • Gründler, Klaus

Abstract

This paper investigates the causes of the "vanishing effect of finance" detected in recent studies. The results highlight that the negative effect of the financial system on growth is mainly driven by advanced economies, whereas finance is still beneficial for income increases in developing countries. The reason is that finance and growth are associated via a nonlinear relationship, which is due to a fundamental change in the transmission mechanism of finance across different levels of economic and financial development. In early stages of development, finance fosters entrepreneurship, education, and investment in physical capital. As the economies develop, this positive influence vanishes. The negative effect of finance is stronger in countries with sophisticated public education systems, low levels of income inequality, as well as low fertility rates, and in times with low factor productivity growth.

Suggested Citation

  • Gründler, Klaus, 2015. "The vanishing effect of finance on growth," Discussion Paper Series 133, Julius Maximilian University of Würzburg, Chair of Economic Order and Social Policy.
    • Handle: RePEc:zbw:wuewwb:133
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    More about this item

    Keywords

    Economic Growth; Financial Sector; Panel Data;
    All these keywords.

    JEL classification:

    • F40 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - General
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • O47 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence

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