Nottingham Centre for Research on
Globalisation and Economic Policy (GEP)

GEP 2022/04: The causal effects of the darker side of financial development

Abstract

We study the causal implications of financial deepening for economic development and financial crises, adopting a heterogeneous difference-in-difference framework. Using cross-country data for the past six decades we demonstrate that very high levels of finance, proxied by credit/GDP, are neither associated with lower long-run growth nor with higher short-run propensity of banking crises due to ‘credit booms gone bust’ cycles or unfettered capital inflows. When we investigate ‘too much finance’ at intermediate levels of credit/GDP we find increased crisis propensity due to capital inflows and commodity price movements, but, again, no detrimental long-run growth effects for these (emerging) economies.

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Authors

Rachel Cho, Rodolphe Desbordes and Markus Eberhardt 

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Posted on Wednesday 6th July 2022

Nottingham Centre for Research on Globalisation and Economic Policy

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