Article ID | Journal | Published Year | Pages | File Type |
---|---|---|---|---|
5058867 | Economics Letters | 2014 | 4 Pages |
â¢Credit expansion has a positive output growth effect only up to a point.â¢Beyond the threshold the impact of finance on growth vanishes.â¢The non-linearity may stem from the omission of factors not considered so far.â¢The omitted factors may have negative growth effects in mature financial sectors.â¢Such factors include financial cycles and banks' non-intermediation activities.
We find that an expansion of credit has a positive effect on per capita output growth only up to a point. Beyond this threshold the impact of finance on growth is not statistically significant anymore. We show, however, that the estimated non-linear relationship may stem from the omission of factors not considered in the literature so far. These factors may have a negative impact on growth in mature financial systems, and include the magnitude of financial cycles as well as the importance of non-intermediation activities in banks' business models.