FINANCIAL DEVELOPMENT AND ECONOMIC-GROWTH

This paper examines the empirical relationship between long-run growth and financial development, proxied by the ratio between bank credit to the private sector and GDP. We find that this proxy is positively correlated with growth in a large cross-country sample, but its impact changes across countries, and is negative in a panel data for Latin America. We argue that the latter findings is the result of financial liberalization in a poor regulatory environment. Our findings also show that the main channel of transmission from financial development to growth is the efficiency, rather than the volume, of investment.