Working Paper: NBER ID: w20917
Authors: Joshua Aizenman; Yothin Jinjarak; Donghyun Park
Abstract: We use data from the Groningen Growth and Development Centre (GGDC) database to perform preliminary empirical analysis of the interplay between quality and quantity of finance in accounting for the output growth of ten sectors. We review the existing literature and some salient open questions pertaining to the relationship between financial depth and output growth. Our analysis looks at the finance-growth nexus in 41 economies, including 11 East Asian and 9 Latin American economies for a comparison between two regions which are at similar income levels. We document large differences between the two regions in terms of the impact of financial depth on sectoral growth, and validate the negative impact of financial deepening on output growth in several sectors. Our results suggest that the impact of financial development on growth may be non-linear – i.e. it may promote growth only up to a point.
Keywords: financial development; output growth; developing Asia; Latin America; sectoral analysis
JEL Codes: G20; G30; O40; O47; O57
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| financial depth (O16) | output growth (O40) |
| financial depth (O16) | construction sector growth (L74) |
| financial depth (O16) | manufacturing sector growth (O14) |
| financial depth (O16) | finance sector growth (O16) |
| financial depth (O16) | insurance sector growth (G22) |
| financial depth (O16) | real estate sector growth (L85) |
| lending-deposit interest spread (G21) | finance sector growth (O16) |
| lending-deposit interest spread (G21) | real estate sector growth (L85) |
| lending-deposit interest spread (G21) | construction sector growth (L74) |
| financial development (O16) | output growth (O40) |
| excessive financial development (F65) | crises or declining productivity (O49) |