The effect of financial development on economic growth: a meta-analysis

Abstract

Empirical studies on the finance-growth relationship show a wide range of estimated effects. We perform a meta-analysis on in total 551 estimates from 68 empirical studies that take private credit to GDP as a measure for financial development and distinguish between linear and logarithmic specifications. First, we find evidence of significantly positive publication bias in both the linear and loglinear specifications. This contrasts with findings in two other recent meta-studies, possibly due to a distortion introduced by their transformation procedure. Second, the logarithmic estimates give a robust significantly positive average effect of financial development on economic growth after correction for publication bias. In our preferred specification a 10 percent increase in credit to the private sector increases economic growth with 0.09 percentage points. For the linear estimates, no significant effect of credit to the private sector on economic growth is found on average. Over-all, the evidence points to a positive but decreasing effect of financial development on growth.

Financial development and economic growth in sub-Saharan Africa: A sectoral perspective

“…The findings of both studies supported the too much finance hypothesis. In a metaanalysis study by Bijlsma et al (2018) covering 68 empirical studies, they concluded that the impact of finance on growth is positive but decreases over time in line with the too much finance hypothesis.…”

The non‐linearity between finance and economic growth: a literature review and evidence from China

“…In another ground-breaking study, Rioja and Valev (2004) divide the sample countries into three groups according to their FD level and find that only in the group that has a middle level of FD does finance have a large and positive effect on output growth. In their words, 'financial development exerts a strong 1 However, another meta-analysis that was conducted by Bijlsma et al (2018) shows that there is a publication bias in the literature, namely, studies that report a positive effect of financial development on economic growth are more easily published. Therefore, 'the literature has exaggerated the size of the finance-growth effect in the past' (Bijlsma et al 2018:1).…”

Financial access and the finance–growth nexus: evidence from developing economies

“…The dependent variable, economic growth, is measured by real GDP per capita. This follows previous empirical studies that examine the relationship between economic growth and financial development (Bijlsma et al, 2018;King and Levine, 1993 denoted by y it , captures economic growth and adjusts for total population and inflation (Haini, 2020). Real GDP per capita is generally used to compare standards of living between countries and over time.…”