Financial development, crises and growth

Abstract

This article examines whether the effect of crises on growth varies across different levels of financial development. Using panel dataset and dynamic panel data estimation techniques, we find that financial crises have a strong negative effect on growth. More importantly, this impact varies with the level of financial development, such that countries with better developed financial systems are adversely affected by crises whereas such effects are minimal or nonexistent in economies with less developed systems. These results are robust across various model specifications.

Notes

¹See, for example, DeGregorio and Guidotti (1995), King and Levine (1993), Levine and Zervos (1998) and Levine et al. (2000).

²See, for example, Bonfiglioli and Mendicino (2006) and Ranciere et al. (2006).

³See Kaminsky and Reinhart (1999) for a survey of the literature.

⁴This index is one of the three indicators used in Levine et al. (2000) and measures the amount of savings investments allocated by private banks versus the central bank.

⁵We abstract from details on these estimators, as they have been widely applied in a number of studies. See Arellano and Bond (1991), Arellano and Bover (1995) and Blundell and Bond (1998) for technical details on the GMM difference and system estimators.

⁶See, for example, Kaminsky and Reinhart (1999), Bonfiglioli and Mendicino (2006) and Ranciere et al. (2006).