2025/24 | LEM Working Paper Series | ||||||||||||||||
![]() |
|||||||||||||||||
The finance-growth nexus over the long-run |
|||||||||||||||||
Krystian Bua, Giovanni Dosi and Maria Enrica Virgillito |
|||||||||||||||||
Keywords | |||||||||||||||||
![]() |
![]() |
||||||||||||||||
Finance-growth nexus, Financial development, Economic growth, Semiparametric methods, Time-varying estimates, Long-panel.
|
|||||||||||||||||
JEL Classifications | |||||||||||||||||
![]() |
![]() |
||||||||||||||||
C14, E44, N20, O16
|
|||||||||||||||||
Abstract | |||||||||||||||||
![]() |
![]() |
||||||||||||||||
This paper studies the finance-growth nexus in
historical perspective. We employ a panel data
model with interactive fixed effects and
time-varying coefficients for a sample of advanced
economies since the late 19th century. The model
considers flexible specifications of heterogeneity
and accounts for global common shocks that have
likely shaped the finance-growth nexus over
time. We present three main sets of
results. First, our empirical analysis shows that
the relationship between finance and growth is
time-varying. Using our benchmark model, we
estimate the time-varying slope coefficient of
financial development and show that the
finance-growth nexus has secularly evolved, thus
challenging the mainstream assumption of a uniform
association over time. Second, by accounting for
global common shocks and their heterogeneous
impact, we challenge the dominant narrative
suggesting a consistently positive contemporaneous
relationship between financial development and
economic growth. Third, differences emerge when we
distinguish between Schumpeterian finance (bank
credit growth) and a more speculative type of
finance (stock market growth). While both exhibit
time-varying behaviors, the empirical evidence
points to a substantially stronger and positive
association between bank credit growth and
economic growth, as opposed to stock markets,
which tend to display a weaker or even negative
relationship. Our results remain robust when we
account for a range of alternative specifications
and potential sources of variation.
|
Downloads
|
![]() ![]() |
|
![]()
|
![]() |