Economic Growth. Does Finance Matter?

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

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.