While it is fair to say that almost all countries are better off than they were 70 years ago, this wealth seems to be distributed ever more unequally. One of the most significant questions – not just in economics, but social sciences in general – is how these differences came to be and what can be done to reduce them. Why do some countries thrive while others perish? What determines their growth?
This thesis explores one aspect of economic growth: the importance of a well developed, that is deep, accessible, efficient, and stable financial system. The discussion of this finance-growth-nexus can be traced back all the way to Schumpeter (1911) and was more recently revived by King and Levine (1993). Since then, numerous studies have investigated the subject – to this day without reaching a consensus. The objective of this thesis is to not only review some of the empirical and theoretical evidence , but to also replicate and expand on the research with recent data and a novel approach to measuring financial development. To this end, the author has compiled an unbalanced panel of 121 countries over the period from 1960 to 2017, which will serve as a basis for the empirical part of the argumentation
Contents
1 Introduction
2 Background
2.1 The Finance-Growth-Nexus
2.2 A Finance-Augmented Growth Model
3 Data
4 Methodology
5 Results
6 Conclusion
Bibliography
A Graphical Appendix
A.1 Changes in the Income Distribution
A.2 Improving the Distribution of the FDI
A.3 Overview of the 2017 FDI
A.4 Correlation between the FDI and its Components
B Data & Methodology Appendix
B.1 Summary of the Variables
B.2 Statistical Tests for Panel Model
C Results Appendix
C.1 Results using different Finance Indicators
Research Objective and Scope
This thesis examines the relationship between financial system development and economic growth, specifically evaluating whether a deep, efficient, and stable financial system serves as a catalyst for economic development. The research addresses the following key areas:
- The theoretical and empirical "finance-growth nexus" and its historical evolution.
- Development of a modified Solow-growth model incorporating financial institutions.
- Construction of a novel multi-dimensional Financial Development Indicator (FDI).
- Empirical analysis using a panel dataset of 121 countries from 1960 to 2017.
- Evaluation of instrumental variable and panel data regression methodologies.
Auszug aus dem Buch
2.1 The Finance-Growth-Nexus
While the exact origin of research regarding the entanglement between financial development and economic growth is unclear, most authors trace it to at least Schumpeter (1911) and Sombart (1916), who argued in favor of a positive effect. Patrick (1966) observed that financial institutions increase in number and variety with economic growth. However, he also points to one of the most important problems in this area of research: the direction of causality, that is the difficulty in establishing whether finance influences economic growth or economic growth finance. Goldsmith (1969) attempted first empirical investigations of this nexus.
To this day, theory and evidence provide mixed conclusions about the causal nature of the relationship between finance and growth. One reason for this complexity is that the analysis requires the synthesizing of different specialties (e.g. economics, history, political science, . . . ) (see Levine 2004) as well as methodologies (quantitative vs. qualitative, macro vs. micro). As argued by Apergis et al. (2007), the theories and evidence expressed in the finance-growth nexus, can be separated into four (competing) categories. The supply-leading view expresses that financial development spurs economic growth, while the demand-following view argues in favor of the opposite: financial development accrues due to economic growth. Some economists argue in favor of a middle ground, that is both financial institutions and economic growth feed back into each other. Finally, a fourth strand of literature argues that there is no apparent influence in neither direction whatsoever. We are now going to take a closer look at each of these argumentations and their evidence.
Summary of Chapters
1 Introduction: Provides an overview of the global income disparity and introduces the research problem regarding the impact of financial systems on economic growth.
2 Background: Reviews existing theories on the finance-growth nexus and proposes a modified Solow-growth model that explicitly accounts for financial development.
3 Data: Details the construction of the Financial Development Indicator (FDI) and the selection of control variables and instruments used for the empirical analysis.
4 Methodology: Outlines the econometric strategy, including panel data models and instrumental variable techniques to address endogeneity.
5 Results: Presents the findings from the empirical regressions and discusses the performance of the FDI across various country sub-samples.
6 Conclusion: Synthesizes the results and offers a final assessment on the complexity of the relationship between finance and economic growth.
Keywords
Finance-growth-nexus, Economic growth, Financial development, Solow-growth model, Instrumental variables, FDI, Panel data, Endogeneity, Institutions, Financial systems, Capital accumulation, Macroeconomics, Development economics, Econometrics, Financial stability.
Frequently Asked Questions
What is the fundamental subject of this research?
This thesis examines the relationship between the development of a country's financial system and its long-term economic growth rate.
What are the primary thematic fields covered?
The work covers growth theory, empirical macroeconomics, the operationalization of financial development indices, and econometric modeling of causality.
What is the primary research goal?
The goal is to determine if a well-developed financial system effectively acts as a catalyst for economic growth or if it is merely a by-product of development.
Which scientific methodology is employed?
The thesis uses a panel data approach with instrumental variable (IV) techniques, specifically two-stage least squares (TSLS), to address endogeneity and causal inference.
What topics are discussed in the main body?
The body covers the literature review on the finance-growth nexus, the theoretical modeling of financial efficiency in production, and the empirical testing of these relationships using global data.
Which keywords define this work?
Key terms include the finance-growth-nexus, financial development, economic growth, instrumental variables, and institutional economics.
How is the Financial Development Indicator (FDI) constructed?
The FDI is constructed using a multi-dimensional approach, similar to the Human Development Index (HDI), aggregating data on depth, access, efficiency, and stability of financial institutions and markets.
Why are legal origins used as instruments in this study?
Legal origins are used as instruments because they are historically established and exogenous to modern economic growth, which helps isolate the exogenous component of financial development to solve the reverse causality problem.
What does the empirical analysis suggest about the finance-growth relationship?
The results show ambiguity, suggesting that the impact of finance on growth is complex, context-dependent, and likely non-linear, which challenges a simple supply-leading hypothesis.
What does the author conclude regarding the "Anna-Karenina" hypothesis?
The author suggests that just as all happy families are alike but unhappy ones are unhappy in their own way, countries experiencing growth are similar in their sound institutional foundations, while those lagging behind suffer from a wide variety of missing determinants.
- Arbeit zitieren
- Niklas Humann (Autor:in), 2021, Economic Growth. Does Finance Matter?, München, GRIN Verlag, https://www.grin.com/document/1131253
