More Bankers, More Growth? Evidence from OECD Countries

Abstract

We re-examine empirically the finance-growth relationship. We argue that financial deepening should not only be assessed via the familiar measures of financial activity output-the volume of credit-but also through its inputs-for example, the relative number of employees in the financial industry-or the efficiency of the financial-intermediation process. The latter is measured in this paper by the ratio of credit volume to the number of financial-sector employees. We compare these measures using the econometric approach recommended by Roodman (2009). Overall, we fail to find a positive relationship between financial deepening and economic growth in OECD countries over the last 40 years.(J.E.L.: G20). Paris 1 Panth eon-Sorbonne. The authors thank Agn es B enassy-Qu er e, Andrew Clark, J ezabel Couppey-Soubeyran and Val erie Mignon, as well as the referees for helpful comments. This work was carried out while the authors were affiliated to the CEPII. The usual disclaimer applies.

More Bankers, More Growth? Evidence from OECD Countries

“…Only in the third column with Private credit/employees and the simple controls set do the Hansen and difference‐in‐Hansen tests both fail. Only few of the control variables are statistically significant (see Capelle‐Blancard and Labonne, ). This result may seem odd prima facie, but is fairly usual in this kind of approach, especially with a panel of developed countries.…”

“…() may be spurious and should not be used to reject the hypothesis that finance does not cause growth. As such, we follow the approach in Roodman () (see Capelle‐Blancard and Labonne, for details).…”

Too much finance or too many weak instruments?

“…However, considering more recent data, Rousseau and Wachtel (2011) show that the positive relationship between finance and growth is not as strong as it was in previous studies using data prior to 1990. Focusing on an alternative proxy for financial development, Capelle-Blancard and Labonne (2016) show that there is no positive relationship between finance and growth for OECD countries over the past 40 years. Demetriades and Rousseau (2016) also find that financial depth is no longer a significant growth determinant.…”