Seminar: The effect of financial development on economic growth: a meta-analysis

Time: 13.00-14.00 hours
Location: CPB-office, Van Stolkweg 14, The Hague

Presentation: Mariëlle Non (CPB)

Discussant: Dirk Bezemer (RuG)

Language: English

Registration:  Please register here

Abstract subject:
The financial crisis has sparked renewed interest in the relation between financial development and economic growth. To date there is no consensus on the effect of a more developed financial sector on the growth of GDP. In theory, a more developed financial sector might lead to more efficient financial intermediation, but on the other hand it might lead to misallocation of credit and of talent. Empirical studies on the finance-growth relationship show a wide range of estimated effects. We perform a meta-analysis on in total 441 estimates from 58 empirical studies that take private credit to GDP as a measure for financial development. This analysis allows us to obtain a more precise estimate of the effect of financial development on growth while also correcting for publication bias. We split our sample in 220 estimates of a logarithmic (decreasing returns to scale) relationship between finance and growth and 221 estimates of a linear relationship. After correction for publication bias, the logarithmic estimates give a significant and positive average effect of 0.011, implying that a 10 percent increase in credit to the private sector increases economic growth with 0.105 percentage points. In contrast, we do not find significant evidence for publication bias in the linear estimates and their average effect is not significantly different from zero. The results are robust to different specifications of the meta regression equation.

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