Economic Growth Research

Financial Intermediation and Growth: Causality and Causes
by Ross Levine, Norman Loayza and Thorsten Beck

Abstract
This paper evaluates (1) whether the exogenous component of financial intermediary development influences economic growth and (2) whether cross-country differences in legal and accounting systems (e.g., creditor rights, contract enforcement, and accounting standards) explain differences in the level of financial development. Using both traditional cross-section, instrumental variable procedures and recent dynamic panel techniques, we find that the exogenous component of financial intermediary development is positively associated with economic growth. Also, the data show that cross-country differences in legal and accounting systems help account for differences in financial development. Together, these findings suggest that legal and accounting reforms that strengthen creditor rights, contract enforcement, and accounting practices can boost financial development and accelerate economic growth. 

Erratum
There was a data mistake in the original data used for the panel regressions. Specifically, the data for average years of secondary schooling were shifted by one line for some OECD countries. We therefore re-ran the panel regressions (Tables 4 and 5) and the unpublished appendix Tables VII and VIII. The results do not change substantially. We provide the revised results for Tables 4 and 5 (and update the appendix tables that are available on the Web). The data file has also been updated with the correct series for average years of secondary schooling in the panel data set. Note, that neither the cross-section estimations nor the results were affected by this mistake.

Also available:     full text (PDF format)
                           data set
                           additional tables and figures

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