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J. Arcand et al. (Märts 2011) Liig-finantseerimise uurimusvisand, Google’is*: võib-olla meilegi huvitav

J. Arcand et al. (Märts 2011) Liig-finantseerimise uurimusvisand, Google’is*: võib-olla meilegi huvitav

 Too Much Finance?

Jean Louis Arcand, The Graduate Institute; Enrico Berkes,

IMF and Ugo Panizza, UNCTAD

Preliminary: Comments welcome

Abstract

This paper examines whether there is a threshold above which financial development

no longer has a positive effect on economic growth. We develop a simple model in which

the expectation of a bailout may lead to a financial sector which is too large with respect

to the social optimum. We then use different empirical approaches to show that there

can indeed be “too much” finance. In particular, our results suggest that finance starts

having a negative effect on output growth when credit to the private sector reaches

110 percent of GDP. We conclude by showing that the size of the financial sector was

a significant amplifying factor in the global crisis that followed the collapse of Lehman

Brothers in September 2008.

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1 Introduction

This paper provides a fresh look at the relationship between financial development and

economic growth. It reproduces the standard result that, at intermediate levels of financial

development, there is a positive relationship between the size of the financial system and

economic growth, but it also shows that, at high levels of financial development, more finance

is associated with less growth. This non-monotone relationship between economic growth

_Email: jean-louis.arcand@graduateinstitute.ch, eberkes@imf.org, ugo.panizza@unctad.org. We would

like to thank Jörg Mayer for helpful comments. The views expressed in this paper are the authors’ only and

need not reflect, and should not be represented as, the views of any of the institutions that the authors are

affiliated with.

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6 Conclusions

In this paper we reassess the relationship between financial development and economic

growth. We find that there is a threshold above which financial development no longer

has a positive effect on economic growth. We show that different types of data and econometric

techniques yield the consistent message that financial development no longer has a

positive effect on growth when credit to the private sector surpasses 100% of GDP. We also

show that the financial sector was an important amplifier of the global economic crisis that

erupted after the collapse of Lehman Brothers in September 2008.

There are two possible reasons why large financial systems may have a negative effect on

economic growth. The first has to do with economic volatility and the increased probability

of large economic crashes (Minsky, 1974, and Kindleberger, 1978) and the second relates

18

to the potential misallocation of resources, even in good times (Tobin, 1984). In future

work, it would be interesting to move beyond the reduced form regressions of this paper and

investigate the channels though which excessive financial development may inhibit economic

growth.

In future research it would also be interesting to see whether the relationship between

financial development and economic growth depends upon the manner through which finance

is provided. In the discussions that followed the recent crisis it has been argued that

derivative instruments and the “originate and distribute” model, which by providing hedging

opportunities and allocating risk to those better equipped to take it were meant to increase

the resilience of the banking system, actually reduced credit quality and increased financial

fragility (UNCTAD, 2008). It would thus be interesting to separate traditional bank lending

from non-bank lending and check whether these types of financial flows have differing effects

on economic growth.

We believe that our results have potentially important implications for financial regulation.

The financial industry has argued that the Basel III capital requirements will have

a negative effect on bank profits and lead to a contraction of lending with large negative

consequences on future GDP growth (Institute for International Finance, 2010). While it is

far from certain that higher capital ratios will reduce profitability (Admati et al., 2010), our

analysis suggests that there are several countries for which tighter credit standards would

actually be desirable.

 

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 *http://3228839428361814816-a-1802744773732722657-s-sites.googlegroups.com/site/upanizza/research/too-much-finace/abp_19a.pdf?attachauth=ANoY7cr8qI8vUxoM9cfMo5FNAuCg5FdviF7LBaz8cEMmgfAGR5Zk8jz9doHUHzLx6g0hKMiAgEpdqFH1SmqFJadVhwfJWtkrDQEL_PU5Dx6BQ-JW7GlEn4QxK5WFbXO08gc1DZIoAr7xG0atqpefzz7oBQgHjLqKoy32UA6bsjLHoV9tqSChuFPifnmWsHxuLvhWIMaAbRj7K5ZVTRyMdPJlcUBZzHqXGnN8zHgAqmvGYLBuiw0BweY%3D&attredirects=0

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April 13, 2011 - Posted by | Uncategorized

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