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Financial Development and Economic Growth: a Meta-Analysis A Service of Leibniz-Informationszentrum econstor Wirtschaft Leibniz Information Centre Make Your Publications Visible. zbw for Economics Valickova, Petra; Havranek, Tomas; Horváth, Roman Working Paper Financial development and economic growth: A meta-analysis IOS Working Papers, No. 331 Provided in Cooperation with: Leibniz Institute for East and Southeast European Studies (IOS), Regensburg Suggested Citation: Valickova, Petra; Havranek, Tomas; Horváth, Roman (2013) : Financial development and economic growth: A meta-analysis, IOS Working Papers, No. 331, Institut für Ost- und Südosteuropaforschung (IOS), Regensburg, http://nbn-resolving.de/urn:nbn:de:101:1-201307223036 This Version is available at: http://hdl.handle.net/10419/79241 Standard-Nutzungsbedingungen: Terms of use: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Documents in EconStor may be saved and copied for your Zwecken und zum Privatgebrauch gespeichert und kopiert werden. personal and scholarly purposes. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle You are not to copy documents for public or commercial Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich purposes, to exhibit the documents publicly, to make them machen, vertreiben oder anderweitig nutzen. publicly available on the internet, or to distribute or otherwise use the documents in public. Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, If the documents have been made available under an Open gelten abweichend von diesen Nutzungsbedingungen die in der dort Content Licence (especially Creative Commons Licences), you genannten Lizenz gewährten Nutzungsrechte. may exercise further usage rights as specified in the indicated licence. www.econstor.eu Arbeitsbereich Ökonomie IOS Working Papers No. 331 July 2013 Financial Development and Economic Growth: A Meta-Analysis Petra Valickova*, Tomas Havranek**, and Roman Horvath*** * Charles University, Prague; ** Czech National Bank and Charles University, Prague; *** Charles University, Prague and IOS, Regensburg. Email: [email protected] Landshuter Straße 4 D-93047 Regensburg Telefon: (09 41) 943 54-10 Telefax: (09 41) 943 54-27 E-Mail: [email protected] Internet: www.ios-regensburg.de Contents Abstract ................................................................................................................... v 1 Introduction ........................................................................................................... 1 2 Measuring Financial Development ...................................................................... 3 3 The Data Set of the Effects of Finance on Growth .............................................. 6 4 Publication Bias ................................................................................................. 10 5 Multivariate Meta-Regression ............................................................................ 15 6 Conclusions ....................................................................................................... 25 References ............................................................................................................. 27 Appendix ................................................................................................................. 30 List of Tables Table 1 Partial Correlation Coefficients for the Relation between Finance and Growth ............................................................................................... 8 Table 2 Test of the True Effect and Publication Bias ........................................... 13 Table 3 Description of Moderator Variables ......................................................... 15 Table 4 Explaining the Differences in the Estimates of the Finance-Growth Nexus ..................................................................................................... 20 List of Figures Figure 1 A Funnel Plot of the Effect of Finance on Growth ................................. 11 Abstract We analyze 1334 estimates from 67 studies that examine the effect of financial develop- ment on economic growth. Taken together, the studies imply a positive and statistically significant effect, but individual estimates vary a lot. We find that both research design and heterogeneity in the underlying effect play a role in explaining the differences in results. Studies that do not address endogeneity tend to overstate the effect of finance on growth. While the effect seems to be weaker in poor countries, the effect decreases worldwide after the 1980s. Our results suggest that stock markets support faster economic growth than other financial intermediaries. We find no evidence of publication bias in the literature. JEL-Classification: C83, G10, O40 Keywords: finance, development, growth, meta-analysis We thank Oana Peia, Martin Strieborny, and James Laurenceson for helpful comments. We acknowledge support from the Czech Science Foundation (grant no. 402/12/1993). An online appendix providing the data set is available at http://meta-analysis.cz/finance _growth. Corresponding author: Roman Horvath, [email protected]. Our views do not necessarily represent those of the Czech National Bank. v Financial Development and Economic Growth 1 Introduction Does the development of the financial sector support economic growth? On the one hand, we observe that financial markets in developed countries display substantial com- plexity, and some researchers suggest a causal effect from financial development on growth (for example, Levine et al. 2000 and Rajan & Zingales 1998). On the other hand, the complexity of financial markets may contribute to financial crises that occur regularly around the world and often cause a long-lasting decrease in growth rates (Kindleberger 1978). In this paper, we quantitatively review the empirical literature on the finance-growth nexus. We focus on two fundamental questions. First, does financial development foster economic growth? Second, are some types of financial structures more conducive to growth than others? This is important in the light of the recent discussion showing con- flicting findings about the importance of different financial structures on growth (see Demirguc-Kunt and Levine, 1996, Levine, 2002, 2003, Beck and Levine, 2004, Luintel et al., 2008, and Demirguc-Kunt et al., 2013, among others). To examine these issues, we use modern meta-analysis techniques. Although origi- nally developed for use in medicine, meta-analysis is increasingly used in economic research (see, for example, Stanley & Jarrell 1998, Card & Krueger 1995, Stanley 2001, Disdier & Head 2008, Doucouliagos & Stanley 2009, and Daniskova & Fidrmuc 2012). To our knowledge, however, a comprehensive meta-analysis of the relation between finance and growth has not yet been conducted, and we aim to bridge this gap. The closest paper to ours is that of Bumann et al. (2013), who use meta-analysis to docu- ment in the related literature a positive but relatively weak effect on financial liberaliza- tion and growth. Our results suggest that the literature identifies an authentic positive link between fi- nancial development and economic growth. We argue that the estimates of the effect reported in the literature are not driven by the so-called publication selection bias, i.e., the preference of researchers, referees, or editors for positive and significant estimates. The results also indicate that the differences in the reported estimates arise not only from the research design (for example, from addressing or ignoring endogeneity) but also from 1 IOS Working Paper No. 331 real heterogeneity in the effect. To be specific, we find that the effect of financial devel- opment on growth varies across regions and time periods. The effect weakens somewhat after the 1980s and is generally stronger in wealthier countries, a finding consistent with Rousseau & Wachtel (2011). Our results also suggest that financial structure is important for the pace of economic growth, as suggested, for example, by Demirguc-Kunt & Lev- ine (1996). We further find that stock market-oriented systems tend to be more condu- cive to growth than bank-oriented systems, which is in line with the theoretical model of Fecht et al. (2008) or empirical evidence by Luintel et al. (2008). The remainder of this paper is structured as follows. In Section 2, we discuss how re- searchers measure financial development. In Section 3, we describe how we collect the data from the literature, and we provide summary statistics of the data set. In Section 4, we test for the presence of publication selection. In Section 5, we examine the heteroge- neity in the reported estimates. Section 6 concludes the paper, and the Appendix pro- vides a list of studies included in the meta-analysis. 2 Financial Development and Economic Growth 2 Measuring Financial Development Our ambition in this section is not to provide an exhaustive survey on the methodology used in the literature to estimate the link between financial development and growth; in this respect, we refer the readers to thorough reviews by Levine (2005) and Ang (2008). Rather, we focus on the key aspect of this empirical literature: the measurement of fi- nancial development. The Financial Development Report 2011, published by the World Economic Forum, defines financial development as “the factors, policies, and institutions that lead to ef- fective financial intermediation and markets, as well
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