Is More Finance Better? Disentangling Intermediation and Size Effects of Financial Systems

T.H.L. Beck, H.A. Degryse, E.C. Kneer

Research output: Working paperDiscussion paperOther research output

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Abstract

Abstract: Financial systems all over the world have grown dramatically over recent decades. But is more finance necessarily better? And what concept of finance – the size of the financial sector, including both intermediation and other auxiliary “non-intermediation” activities, or a focus on traditional intermediation activity – is relevant for its impact on real sector outcomes? This paper assesses the relationship between the size of the financial system and the degree of intermediation, on the one hand, and GDP per capita growth and growth volatility, on the other hand. Based on a sample of 77 countries for the period 1980-2007, we find that intermediation activities increase growth and reduce volatility in the long run. An expansion of the financial sectors along other dimensions has no long-run effect on real sector outcomes. Over shorter time horizons a large financial sector stimulates growth at the cost of higher volatility in high-income countries. Intermediation activities stabilize the economy in the medium run especially in low-income countries.
Original languageEnglish
Place of PublicationTilburg
PublisherEconomics
Number of pages39
Volume2012-060
Publication statusPublished - 2012

Publication series

NameCentER Discussion Paper
Volume2012-060

Fingerprint

Finance
Financial system
Intermediation
Financial sector
Real sector
Low-income countries
Time horizon
Growth volatility
Income
GDP per capita

Keywords

  • Financial intermediation
  • economic growth
  • growth volatility

Cite this

Beck, T. H. L., Degryse, H. A., & Kneer, E. C. (2012). Is More Finance Better? Disentangling Intermediation and Size Effects of Financial Systems. (CentER Discussion Paper; Vol. 2012-060). Tilburg: Economics.
Beck, T.H.L. ; Degryse, H.A. ; Kneer, E.C. / Is More Finance Better? Disentangling Intermediation and Size Effects of Financial Systems. Tilburg : Economics, 2012. (CentER Discussion Paper).
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Beck, THL, Degryse, HA & Kneer, EC 2012 'Is More Finance Better? Disentangling Intermediation and Size Effects of Financial Systems' CentER Discussion Paper, vol. 2012-060, Economics, Tilburg.

Is More Finance Better? Disentangling Intermediation and Size Effects of Financial Systems. / Beck, T.H.L.; Degryse, H.A.; Kneer, E.C.

Tilburg : Economics, 2012. (CentER Discussion Paper; Vol. 2012-060).

Research output: Working paperDiscussion paperOther research output

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AB - Abstract: Financial systems all over the world have grown dramatically over recent decades. But is more finance necessarily better? And what concept of finance – the size of the financial sector, including both intermediation and other auxiliary “non-intermediation” activities, or a focus on traditional intermediation activity – is relevant for its impact on real sector outcomes? This paper assesses the relationship between the size of the financial system and the degree of intermediation, on the one hand, and GDP per capita growth and growth volatility, on the other hand. Based on a sample of 77 countries for the period 1980-2007, we find that intermediation activities increase growth and reduce volatility in the long run. An expansion of the financial sectors along other dimensions has no long-run effect on real sector outcomes. Over shorter time horizons a large financial sector stimulates growth at the cost of higher volatility in high-income countries. Intermediation activities stabilize the economy in the medium run especially in low-income countries.

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Beck THL, Degryse HA, Kneer EC. Is More Finance Better? Disentangling Intermediation and Size Effects of Financial Systems. Tilburg: Economics. 2012. (CentER Discussion Paper).