TOO MUCH FINANCE?

Saturday 12 November 2011, 14:00 - 15:30

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Session: Financial Development
When & Where: Saturday 12 November 2011, 14:00 - 15:30, Room 304-C (70)
Presented By: Ugo Panizza, UNCTAD
Co-Author(s): Jean Louis Arcand, HEID and Enrico Berkes, IMF

This paper examines whether there is a threshold above which financial development no longer has a positive effect on economic growth. We develop a simple model in which the expectation of a bailout may lead to a financial sector which is too large with respect to the social optimum. We then 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 110 percent of GDP. We conclude by showing that the size of the financial sector was a significant amplifying factor in the global crisis that followed the collapse of Lehman Brothers in September 2008.

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