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
2See, for example, Bonfiglioli and Mendicino (2006) and Ranciere et al. (Citation2006).
3See Kaminsky and Reinhart (Citation1999) for a survey of the literature.
4This index is one of the three indicators used in Levine et al. (Citation2000) 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 (Citation1991), Arellano and Bover (Citation1995) and Blundell and Bond (Citation1998) for technical details on the GMM difference and system estimators.
6See, for example, Kaminsky and Reinhart (Citation1999), Bonfiglioli and Mendicino (2006) and Ranciere et al. (Citation2006).
De Gregorio
,
J.
and
Guidotti
,
P. E.
1995
.
Financial development and economic growth
.
World Development
,
23
:
433
–
38
.
King
,
R.
and
Levine
,
R.
1993
.
Finance and growth: Schumpeter might be right
.
Quarterly Journal of Economics
,
108
:
717
–
38
.
Levine
,
R.
and
Zervos
,
S.
1998
.
Stock Markets, Banks and Long-run Economic Growth
.
American Economic Review
,
88
:
537
–
58
.
Levine
,
R.
,
Loayza
,
N.
and
Beck
,
T.
2000
.
Financial intermediation and growth: causality and causes
.
Journal of Monetary Economics
,
46
:
31
–
77
.
Ranciere
,
R.
,
Tornell
,
A.
and
Westermann
,
F.
2006
.
Decomposing the effects of financial liberalization: crises vs. growth
.
Journal of Banking and Finance
,
30
:
3331
–
48
.
Kaminsky
,
G. L.
and
Reinhart
,
C. M.
1999
.
The twin crises: the causes of banking and balance of payments problems
.
American Economic Review
,
89
:
473
–
500
.
Levine
,
R.
,
Loayza
,
N.
and
Beck
,
T.
2000
.
Financial intermediation and growth: causality and causes
.
Journal of Monetary Economics
,
46
:
31
–
77
.
Arellano
,
M.
and
Bond
,
S.
1991
.
Some tests of specification for panel data: Monte Carlo evidence with an application for employment equations
.
Review of Economic Studies
,
58
:
277
–
97
.
Arellano
,
M.
and
Bover
,
O.
1995
.
Another look at the instrumental variable estimation of error-component models
.
Journal of Econometrics
,
68
:
29
–
51
.
Blundell
,
T.
and
Bond
,
S.
1998
.
Initial conditions and moment restrictions in dynamic panel data models
.
Journal of Econometrics
,
87
:
115
–
43
.
Kaminsky
,
G. L.
and
Reinhart
,
C. M.
1999
.
The twin crises: the causes of banking and balance of payments problems
.
American Economic Review
,
89
:
473
–
500
.
Ranciere
,
R.
,
Tornell
,
A.
and
Westermann
,
F.
2006
.
Decomposing the effects of financial liberalization: crises vs. growth
.
Journal of Banking and Finance
,
30
:
3331
–
48
.