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Econ Change Restruct (2014) 47:89115
DOI 10.1007/s10644-013-9143-x
Edoardo Gaffeo Petya Garalova
Received: 2 March 2012 / Accepted: 19 February 2013 / Published online: 5 March 2013 Springer Science+Business Media New York 2013
Abstract We investigate the nance-growth nexus for a sample of thirteen transition economies over the period 19952007 using panel cointegration tests and a panel error-correction model. By combining results for models with alternative dependent variables and several measures of nancial development, we nd that the relationship between nancial deepening and real growth is largely positive in the long-run, and it develops its full potential when funds are directed towards private enterprises. In the short-run, however, the growth effects of an expansion of nancial markets are weaker and negative, supporting the idea that nancial development has also a dark side, as it exacerbates fragility and destabilizes the economy through recurrent crises.
Keywords Financial development Economic growth Panel causality
Transition countries
JEL codes C33 O16 O52
1 Introduction
Starting from the ground-breaking work of Goldsmith (1969) and Shaw (1973), the role that the nancial sector plays in promoting a sound macroeconomic
We are indebted with Roberto Tamborini for his comments, and with an anonymous referee for criticisms and suggestions which have allowed us to signicantly improve the paper. The views and opinions expressed are those of the authors and do not necessarily represent the views of CER.
E. Gaffeo (&)
Department of Economics and Management, University of Trento, Via Inama 5, 38100 Trento, Italy e-mail: [email protected]
P. Garalova
Centro Europa Ricerche, Rome, Italy
On the nance-growth nexus: additional evidence from Central and Eastern Europe countries
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performance has been a vital subject of debate among scholars. A classic reference is Levine (2005), which offers a notable one-stop exposition of the topic. In particular, the nance-growth nexus has gained centre stage with the emergence of endogenous growth models and the formal study of asymmetric information, which have uncovered important insights into the possible connections between nancial development and economic growth. According to the original wisdom developed in the 1990s, in the presence of capital market imperfections nancial institutions provide services which lower transaction costs and activate information owsall factors that sensibly affect saving decisions and the accumulation of both physical...