IronMagLabs Osta Rx

          Follow Us on Facebook        Subscribe to us on YouTube        Follow Us on Twitter        IronMagLabs on Instagram        Sign Up for our Newsletter


IMF Working Paper 2012 - Too Much Finance?

Results 1 to 2 of 2
  1. #1
    Is Doin It 4 Da Shorteez
    LAM's Avatar


    Join Date
    May 2002
    Gender
    Male
    Location
    Las Vegas & Florida & St. Croix
    Posts
    16,311
    Rep Points
    923581149

    IMF Working Paper 2012 - Too Much Finance?






    IMF Working Paper
    Research Department
    Too Much Finance?*
    Prepared by Jean-Louis Arcand, Enrico Berkes and Ugo Panizza
    Authorized for distribution by Andrew Berg
    June 2012

    Abstract
    This paper examines whether there is a threshold above which financial development no
    longer has a positive effect on economic growth. We use different empirical approaches to
    show that there can indeed be ?too much? finance. In particular, our results suggest that
    finance starts having a negative effect on output growth when credit to the private sector
    reaches 100% of GDP. We show that our results are consistent with the "vanishing effect"
    of financial development and that they are not driven by output volatility, banking crises,
    low institutional quality, or by differences in bank regulation and supervision.

    p 23.

    V. CONCLUSIONS

    In the summer of 2011, former FED chairman Alan Greenspan wrote an Op Ed that
    criticized regulatory reforms aimed at tightening capital standards in the US financial
    sector. He stated that such reforms may lead to the accumulation of "excess of buffers at
    the expense of our standards of living" (Greenspan, 2011).

    The view that policies that lead to a reduction in total lending may have a negative effect
    on standards of living seems to be based on the assumption that larger financial sectors are
    always good for economic growth. This paper questions this assumption and shows that in
    countries with very large financial sectors there is no positive correlation between
    financial depth and economic growth. In particular, we find that there is a positive and
    robust correlation between financial depth and economic growth in countries with small
    and intermediate financial sectors, but we also show that there is a threshold (which we
    estimate to be at around 80-100% of GDP) above which finance starts having a negative
    effect on economic growth. We show that our results are robust to using different types of
    data and estimators. We also showed that our results are consistent with the "vanishing
    effect" of finance reported by various authors using recent data: when a specification
    which omits the quadratic term is mis-specified, and the "true" relationship is indeed
    quadratic, the downward bias in the linear term will increase as more and more
    observations correspond to countries with particularly large financial sectors.

    We believe that our results have potentially important implications for financial regulation.
    Using arguments similar to those in Mr. Greenspan?s Op Ed, the financial industry lobbied
    against Basel III capital requirements by suggesting that tighter capital regulation will
    have a negative effect on bank profits and lead to a contraction of lending with large
    negative consequences on future GDP growth (Institute for International Finance, 2010).
    While it is far from certain that higher capital ratios will reduce profitability (Admati et
    al., 2010), our analysis suggests that there are several countries for which smaller financial
    sectors would actually be desirable.

    There are two possible reasons why large financial systems may have a negative effect on
    economic growth. The first has to do with economic volatility and the increased
    probability of large economic crashes (Minsky, 1974, and Kindleberger, 1978) and the
    second relates to the potential misallocation of resources, even in good times (Tobin,
    1984).

    Rajan (2005) and de la Torre et al. (2011) provide numerous insights on the dangers of
    excessive financial development, but they mostly focus on the finance-crisis nexus. The
    discussion of the "Dark Side" of financial development by de la Torre et al. (2011) is
    particularly illuminating (pun intended). They point out that the "Too much finance" result
    may be consistent with positive but decreasing returns of financial depth which, at some
    point, become smaller than the cost of instability brought about by the dark side. While
    this may be true, it is important to note that our results are robust to restricting the analysis
    to tranquil periods. This suggests that volatility and banking crises are only part of the
    story. Of course, it would be possible that in the presence of decreasing returns to
    financial development the marginal cost of maintaining financial stability becomes higher
    than the marginal return of financial development (de la Torre et al., 2011, make this
    point). In this case, however, the explanation for our "Too Much Finance" result would not
    be one of financial crises and volatility (which do not necessarily happen in equilibrium)
    but one of misallocation of resources.

    Another possible explanation for our result has to do with the fact that the relationship
    between financial depth and economic growth could depend upon the manner through
    which finance is provided. In the discussions that followed the recent crisis it has been
    argued that derivative instruments and the "originate and distribute" model, which by
    providing hedging opportunities and allocating risk to those better equipped to take it
    were meant to increase the resilience of the banking system, actually reduced credit
    quality and increased financial fragility (UNCTAD, 2008). Perhaps a test that separates
    traditional bank lending from non-bank lending could reveal whether these types of
    financial flows have differing effects on economic growth.

    It is also plausible that the relationship between financial depth and economic growth
    depends on whether lending is used to finance investment in productive assets or to feed
    speculative bubbles. Using data that for 45 countries for the period 1994-2005, Beck et al.
    (2009) show that enterprise credit is positively associated with economic growth but that
    there is no correlation between growth and household credit. It is possible that a dataset
    that includes more countries and time periods would show that it is the rapid expansion of
    household credit that leads to the negative effect of financial development that we
    document in this paper.


    http://www.imf.org/external/pubs/ft/wp/2012/wp12161.pdf
    William F. Buckley describes a conservative as, "someone who stands athwart history, yelling Stop." - and then proceeds to drag civilization back to times best left in history's dungheap.

  2. #2
    Is Doin It 4 Da Shorteez
    LAM's Avatar


    Join Date
    May 2002
    Gender
    Male
    Location
    Las Vegas & Florida & St. Croix
    Posts
    16,311
    Rep Points
    923581149






    for those that read the abstract total credit to the private sector is roughly 40T dollars or about 3x US GDP, with finance starting to have a negative effect on economic growth at 100% of GDP.
    William F. Buckley describes a conservative as, "someone who stands athwart history, yelling Stop." - and then proceeds to drag civilization back to times best left in history's dungheap.

Similar Threads

  1. Replies: 1
    Last Post: 10-12-2012, 12:08 AM
  2. Replies: 0
    Last Post: 01-09-2012, 02:50 PM
  3. Help me with my research paper-
    By BerryBlis in forum Training
    Replies: 8
    Last Post: 09-20-2004, 11:16 AM
  4. Paper Steroids
    By BcHawk_99 in forum Anabolic Zone
    Replies: 9
    Last Post: 09-21-2003, 07:10 PM

Posting Permissions

  • You may not post new threads
  • You may not post replies
  • You may not post attachments
  • You may not edit your posts
  •  
DISABLED END -->