On the (Nonmonotonic) Relation Between Economic Growth and Finance

Abstract

We analyze the simplest possible model of endogenous growth to account for the role of financial development. In our setting, financial development affects productivity and determines the amount of resources subtracted to capital investment. We show that under very general assumptions, the relation between economic growth and financial depth is nonmonotonic, and eventually bell-shaped. We empirically assess our results in a framework that allows to distinguish between long-run and short-run effects. We establish a cointegrating relation and derive the long-run elasticities of per capita gross domestic product (GDP) with respect to employment, the physical capital stock, and financial depth–relying on linear as well as nonlinear models for the finance-growth nexus. We employ the results of the first step estimation to specify an error–correction model and find that there is strong evidence for a nonlinear relationship between financial depth and per capita GDP, consistently with what was predicted by our theoretical model.

Interplay between financial sector and institutional framework in the economic growth process of Kenya

“…Studies, within the context of endogenous growth theory, are not scarce on the relative importance of financial development as an input in growth process. Recent studies have argued that the impact of finance on growth is nonlinear and indirect (Adusei, 2019; Alexiou, Vogiazas, & Nellis, 2018; Bucci & Marsiglio, 2019; Bucci, Marsiglio, & Prettner, 2019; Deidda & Fattouh, 2002; Ibrahim & Alagidede, 2018; Khanh & Viet, 2019; Law & Singh, 2014). This implies that finance has to pass through different stages and various transmission mechanisms which mediate its influence on growth.…”

On The Nonlinearity of the Finance and Growth Relation: the Role of Human Capital

“…Several authors have tried to analyze from a theoretical perspective how financial development, by interacting either with physical capital accumulation (Pagano, 1993;Trew, 2014;Bucci et al, 2020), or with human capital investment (De Gregorio, 1996; De Gregorio and Kim, 2000; Bucci and Marsiglio, 2019), or else with technological progress (Pagano, 1993;Morales, 2003;Trew, 2008) may impact on economic growth. On the whole, existing theoretical works draw attention to very few alternative explanations as to why the relation between finance and economic growth can be non-monotonic in sign.…”

From financial structure to economic growth: Theory, evidence and challenges

“…For example, financial development has been argued to shape investments in human capital (de Gregorio & Kim, 2000; de Gregorio, 1996; Galor & Zeira, 1993), to impact the composition of investment over the business cycle (Aghion et al, 2010), to tighten product market competition (Varela, 2018) and to promote entrepreneurship, innovation and technology development (Aghion et al, 1999, 2005, 2018; Huang & Xu, 1999; King & Levine, 1993a; Morales, 2003). There are also studies that attempt to model the nonlinear relationship between financial development and economic growth that has been identified by recent empirical literature (Bucci & Marsiglio, 2019; Bucci et al, 2020; Trew, 2014).…”

“…XU | 3 of 16 Levine, 1993a;Morales, 2003). There are also studies that attempt to model the nonlinear relationship between financial development and economic growth that has been identified by recent empirical literature (Bucci & Marsiglio, 2019;Bucci et al, 2020;Trew, 2014).…”