Financial Structure and Economic Growth: Evidence from the USA, the UK, and Japan

Abstract

The past few decades have seen a considerable body of literature dealing with causality relationships between economic growth and financial development for a variety of countries, both developed and developing. In addition to the early classic work of Gurley and Shaw (1960), Goldsmith (1969), and McKinnon (1973), the econometric work of Kormendi and Meguire (1985) and Barro (1991) brought to light the important roles of financial development in raising growth rates of the economies. King and Levine (1993a, b) face more directly the role of financial development in growth processes. More recent work along this line, in addition, underlines the direct financial routes along with indirect ones in explaining the influence of financial development on economic growth; see Levine and Zervos (1998) and Rajan and Zingale (1998). As is well and usefully summarized in Demirguc-Kunt and Levine (2001, particularly chs 1, 3, and 5), this group of work showed in cross-country regression frameworks that it is mainly the total volume of finance and not the proportion of direct/indirect financial routes that is important for the subsequent growth performance of the countries. Beck and Levine (2002), using a panel data as well as cross-country regression, derive a conclusion similar to that of the above book that financial development, but not financial structure, positively affects the growth of industry and the economy.