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Can the financial sector grow too large?

Frykmer, David LU (2018) NEKH02 20181
Department of Economics
Abstract (Swedish)
This paper studies the relationship between financial development and economic growth. Specifically, the model tests if financial development has a positive effect on capital accumulation and total factor productivity. The study is based on data from 114 countries between 1960 and 2010. The data include a broad variety of countries, ranging from low-income to high-income countries. Following from the results, support is found for a non-linear relationship between economic development and both of the growth components, but the non-linearity is stronger between capital accumulation and financial development. Contrary to earlier studies and the corollaries following their conclusions, the regressions in this study find no convincing support... (More)
This paper studies the relationship between financial development and economic growth. Specifically, the model tests if financial development has a positive effect on capital accumulation and total factor productivity. The study is based on data from 114 countries between 1960 and 2010. The data include a broad variety of countries, ranging from low-income to high-income countries. Following from the results, support is found for a non-linear relationship between economic development and both of the growth components, but the non-linearity is stronger between capital accumulation and financial development. Contrary to earlier studies and the corollaries following their conclusions, the regressions in this study find no convincing support for a strictly positive link between financial development and economic growth. In contrast, the results suggest that financial development has an initial positive effect on growth until the financial sector grows too large and reaches a certain threshold. Exceeding the threshold causes further financial development to negatively affect economic growth. The results in this study agree with more recent literature that have reevaluated the connection between the financial sector and economic growth. However, the model used in this paper has proven to be highly responsive to whether fixed effects are controlled for or not, and the robustness of the results may therefore be questioned. With this in mind, one should be careful before drawing any definite conclusions. Additional research is needed to shed further light on the complex finance-growth nexus. (Less)
Please use this url to cite or link to this publication:
author
Frykmer, David LU
supervisor
organization
course
NEKH02 20181
year
type
M2 - Bachelor Degree
subject
keywords
total factor productivity, capital accumulation, economic growth, financial development
language
English
id
8958083
date added to LUP
2018-09-24 15:08:43
date last changed
2018-09-24 15:08:43
@misc{8958083,
  abstract     = {{This paper studies the relationship between financial development and economic growth. Specifically, the model tests if financial development has a positive effect on capital accumulation and total factor productivity. The study is based on data from 114 countries between 1960 and 2010. The data include a broad variety of countries, ranging from low-income to high-income countries. Following from the results, support is found for a non-linear relationship between economic development and both of the growth components, but the non-linearity is stronger between capital accumulation and financial development. Contrary to earlier studies and the corollaries following their conclusions, the regressions in this study find no convincing support for a strictly positive link between financial development and economic growth. In contrast, the results suggest that financial development has an initial positive effect on growth until the financial sector grows too large and reaches a certain threshold. Exceeding the threshold causes further financial development to negatively affect economic growth. The results in this study agree with more recent literature that have reevaluated the connection between the financial sector and economic growth. However, the model used in this paper has proven to be highly responsive to whether fixed effects are controlled for or not, and the robustness of the results may therefore be questioned. With this in mind, one should be careful before drawing any definite conclusions. Additional research is needed to shed further light on the complex finance-growth nexus.}},
  author       = {{Frykmer, David}},
  language     = {{eng}},
  note         = {{Student Paper}},
  title        = {{Can the financial sector grow too large?}},
  year         = {{2018}},
}