Publication: The Econometrics of Finance and Growth
Date
2008-04
ISSN
Published
2008-04
Author(s)
Abstract
This paper reviews different econometric
methodologies to assess the relationship between financial
development and growth. It illustrates the identification
problem, which is at the center of the finance and growth
literature, using the example of a simple Ordinary Least
Squares estimation. It discusses cross-sectional and panel
instrumental variable approaches to overcome the
identification problem. It presents the time-series
approach, which focuses on the forecast capacity of
financial development for future growth rates, and
differences-in-differences techniques that try to overcome
the identification problem by assessing the differential
effect of financial sector development across states with
different policies or across industries with different needs
for external finance. Finally, it discusses firm-level and
household approaches that allow analysts to dig deeper into
the channels and mechanisms through which financial
development enhances growth and welfare, but pose their own
methodological challenges.
Link to Data Set
Citation
“Beck, Thorsten. 2008. The Econometrics of Finance and Growth. Policy Research Working Paper No. 4608. © World Bank, Washington, DC. http://hdl.handle.net/10986/6703 License: CC BY 3.0 IGO.”
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