Financial intermediation and macroeconomic efficiency

Abstract

This article evaluates whether financial intermediary development explains cross-country differences in macroeconomic efficiency. Stochastic frontier approach is applied at the aggregate level to estimate efficiency on a panel of 41 countries for the period 1991 to 1995. Generalized Method of Moments (GMM) dynamic panel techniques are then adopted to control for potential endogeneity of the regressors. We find evidence of a positive role of financial intermediary development on efficiency, with differences in terms of robustness according to the measure of financial intermediary development.

Notes

¹ That is, the current values of explanatory variables are uncorrelated with the future shocks.

² Our results were obtained by using the Ox version of DPD (Doornik et al., 1999).