Development of the banking sector exerts a large, causal impact on total factor productivity growth, which in turn causes GDP to grow. Whether banking development has a long-run effect on capital growth or private saving remains to be seen.
Beck, Levine, and Loayza evaluate whether the level of development in the banking sector exerts a causal impact on economic growth and its sources- total factor productivity growth, physical capital accumulation, and private saving.
They use (1) a pure cross-country instrumental variable estimator to extract the exogenous component of banking development and (2) a new panel technique that controls for country-specific effects and endogeneity. They find that:
This paper—a product of Finance, Development Research Group—is part of a larger effort in the group to understand the links between the financial system and economic growth. Copies of the paper are available free from the World Bank, 1818 H Street NW, Washington, DC 20433. Please contact Kari Labrie, room MC3-456, telephone 202-473-1001, fax 202-522-1155, Internet address klabrie@worldbank.org. Thorsten Beck may be contacted at tbeck@worldbank.org. (46 pages)
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