Financial development, reforms and growth

Abstract

Is there any specific structure of the financial system which promotes economic growth or does this structure depend on the level of economic growth itself? Financial development and financial reforms affect economic growth, but less is known on how this effect varies across different levels of the conditional distribution of the growth rates. We examine this by using panel data for 81 countries for more than 30 years. We account for unobserved heterogeneity and operate within alternative econometric approaches. The findings indicate that financial reforms are important determinants of growth, especially when a country faces relatively low levels of economic growth. Financial development does matter for growth, however, the size and significance of the effect vary. Financial reforms affect economic growth more than financial development. We reveal that the components of financial reforms, which are more important for economic growth, are the supervision of banks and the regulation of securities markets.