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Does too much finance harm economic growth?

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The authors find that the level of financial development is beneficial to growth only up to a certain threshold; beyond the threshold level further development of finance tends to adversely affect growth.

Paper, Journal of Banking and Finance 2014
30 April 2014
Source: University of California Santa Cruz, authors´ site, others

Authors:
Siong Hook Law, Universiti Putra Malaysia
Nirvikar Singh, University of California, Santa Cruz

>  Does too much finance harm economic growth?

Abstract:

This study provides new evidence on the relationship between finance and economic growth using an innovative dynamic panel threshold technique. The sample consists of 87 developed and developing countries. The empirical results indicate that there is a threshold effect in the finance-growth relationship. In particular, we find that the level of financial development is beneficial to growth only up to a certain threshold; beyond the threshold level further development of finance tends to adversely affect growth. These findings reveal that more finance is not necessarily good for economic growth and highlight that an “optimal” level of financial development is more crucial in facilitating growth.

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