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What Is Happening To The Impact Of Financial Deepening On Economic Growth?

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Executive Summary

Although the finance-growth relationship is now firmly entrenched in the empirical literature, the authors show that it is not as strong in more recent data as it was in the original studies with data for the period from 1960 to 1989. They consider several explanations. First, they find that the incidence of financial crises is related to the dampening of the effect of financial deepening on growth. Excessive financial deepening or too rapid growth of credit may have led to both inflation and weakened banking systems which in turn gave rise to growth-inhibiting financial crises.

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