Financial development and growth in European regions

Abstract

We study the relationship between financial development and economic growth across 110 European regions from 1997 to 2018. We single out two dimensions of financial development in the data capturing the capillarity of bank branches and the agglomeration of the financial industry at large and study their relationship with regional economic growth. To establish a causal nexus, we employ two-ways fixed effects, instrumental variables, and the Arellano-Bond estimator. Our estimates indicate that what matters the most for regional economic growth is the agglomeration of a complex financial sector rather than the mere presence of bank branches.

Do terms of trade affect economic growth? Robust evidence from India

“…The effects of domestic investment, lnGDCF, are statistically insignificant in the NLLS estimates. The support for the favourable effects of financial development and trade openness on economic growth is consistent with the evidence obtained in prior research examining the role of financial development (see Levine, 1997, 2005; Pagano, 1993; Rossi & Scalise, 2022) and international trade (see Singh, 2010) in economic growth.…”

“…This study follows Blattman et al (2003Blattman et al ( , 2004Blattman et al ( , 2007 and specifies the long-run model for the effects of TOT on output and economic growth with control variables-financial development, trade openness, and domestic investment. The role of financial development (see Levine, 1997Levine, , 2005Pagano, 1993;Rossi & Scalise, 2022) and international trade (see Singh, 2010) in economic growth is well-documented in the literature. Investment is (1) a source of capital accumulation in the neoclassical exogenous (Solow, 1956;Swan, 1956) and the post-neoclassical endogenous (Lucas, 1988;Romer, 1986) models of economic growth and (2) a component of aggregate demand in the Keynesian business cycle models.…”

“…Second, financial development as one of the drivers of economic growth became the cynosure of empirical research that spurted since the emergence of the post-neoclassical endogenous theory of economic growth in the mid-1980s; see Pagano (1993), Levine (1997Levine ( , 2005 and Rossi and Scalise (2022) for the surveys. The standard measures of financial development used in prior research, however, are beset with several inherent limitations (see Singh, 2008).…”

Making the grass greener

“…However, our findings also indicate that this impact was short-lived and did not impact green investment in the long run. Finally, the findings from the analysis a la Rajan and Zingales (1998 [69]), presented in Table 2, confirm that finance matters for green investment. A higher lending interest rate, which is expected to tighten credit conditions, is estimated to reduce relatively more the propensity to invest in green of financially constrained firms, which are identified using the SAFE composite index, either evaluated at the beginning of the period or on average over the sample period (specifications 1 and 2).…”

“…Next, the second strategy to address endogeneity concerns consists in adopting an approach similar in spirit to Rajan and Zingales (1998 [69]). We use either the lending interest rate or central bank's policy rate to proxy for the easiness and tightness of financing conditions at the country-year level and exploit firms' relative exposure to financial conditions to identify the link between finance and green investment at the firm level.…”