Finance-growth nexus and effects of banking crisis
Date
2009-03-31T08:04:39Z
Authors
Musasiwa, Edmore T.
Journal Title
Journal ISSN
Volume Title
Publisher
Abstract
Many economists have observed that the financial system has a positive and monotonic
effect on economic growth. In this study we reaffirm the finance-growth nexus. We adopt
a three-tier approach for the study’s methodology using panel data of 66 countries from
1986 to 2005. Firstly, we test for the finance-growth nexus with particular emphasis on
financial sector indicators that best represent the effective financing activity in the
economy. Secondly, we examine the financial market type that exacerbates or mitigates
the effects of a shock (financial crisis). Thirdly, we investigate the causes of financial
crisis by looking at both the macroeconomic and institutional, and micro-level
determinants of banking crisis.
Our results show that financial development enhances economic growth, more so, in the
middle income countries. We also find that increased domestic private credit and activity
reduces the effects of a financial shock on growth. In addition, openness of the economy
in low income Sub-Saharan African countries is important for growth even where
financial development indicators appear not to influence growth. In most economies the
investment channel and openness are consistent in explaining economic growth.
Description
Keywords
Financial intermediation, Financial development