Abstract
The role of the financial sector in economic growth received scant attention from economists until very recently. An explosion of research in the last 20 years has firmly entrenched the finance growth nexus in the canon of economic beliefs. This paper suggests that the literature might have over emphasised the strength of the nexus that is much more nuanced than often suggested. The most commonly used measure of financial sector development, financial depth, is difficult to interpret because it can be a reflection of economy wide leverage as well as the quality and quantity of intermediation. Our examination of experience with financial deepening and of other measures of financial activity such as value added does not suggest that finance is unimportant. Instead, it shows how difficult it is to measure financial sector activity adequately.
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Notes
The median is a better measure than the mean because the composition of countries included can vary from year to year and the mean is affected by outliers. The sample begins when there are at least five countries in the group with available data.
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The author appreciate assistance and comments from Josef Brada, Paolo Cavallino, Claudia Curi and Peter L Rousseau.
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Wachtel, P. The Evolution of the Finance Growth Nexus. Comp Econ Stud 53, 475–488 (2011). https://doi.org/10.1057/ces.2011.16
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DOI: https://doi.org/10.1057/ces.2011.16