Financial development and economic growth: A European perspective
This report provides empirical evidence on the relationship between financial development and economic growth in the European Union and the Euro area. It focuses on three issues: (i) the relationship between economic growth and financial depth taking into account its structure in terms of types of financing and fund receivers, (ii) the effects of financial cycles on the financial development-growth nexus, and (iii) simulation of impact of potential realignment of the financial sector. The results indicate that bank credit has a non-linear effect on growth with the peak of positive impact being close to 50% of gross domestic product. Furthermore, both the type of financing (bank credit, debt securities, or stock market) and fund receiver (households, firms, or financial corporations) matters in the financial depth-growth link.
Conditionally on substantial financing of households, bank credit appears to have the most negative impact, whereas the stock market capitalization tends to have a positive one. The negative impact of bank financing appeared to be especially strong during housing market booms. Unconditional impact of debt securities tends to be negative, but they seem to cushion or even foster growth whenever economic growth rates are low relative to lending interest rates or stock market volatility is high. The impact of changes of the financial composition on economic growth rates is sensitive to the initial conditions of a particular economy.
KARAGIANNIS Stylianos;
KVEDARAS Virmantas;
2016-12-20
Publications Office of the European Union
JRC103421
978-92-79-64573-0,
1831-9424,
EUR 28324 EN,
OP LF-NA-28324-EN-N,
https://publications.jrc.ec.europa.eu/repository/handle/JRC103421,
10.2791/53648,
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