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Do efficient banking sectors accelerate economic growth in transition countries?

Author

Listed:
  • Tuuli Koivu

    (Bank of Finland Institute for Economies in Transition)

Abstract
The relationship between financial sector and economic growth in transition countries has been largely ignored in the earlier empirical literature. In this paper, we analyse the finance-growth nexus using a fixed-effects panel model and unbalanced panel data from 25 transition countries during the period 1993-2000. We measure the qualitative development in the banking sectors using the margin between lending and deposit interest rates. Our second variable for the level of financial sector development is the amount of bank credit allocated to the private sector as a share of GDP. According to our results, the interest rate margin is significantly and negatively related to economic growth. This outcome is in line with theoretical models and has important policy implications. On the other hand, a rise in the amount of credit does not seem to accelerate economic growth. The main reasons behind this result could be the numerous banking crises the transition countries have experienced and the soft budget constraints that are still prevalent in many transition countries. Due to these specific characteristics the growth in credit has not always been sustainable and in some cases it may have led to a decline in growth rates.

Suggested Citation

  • Tuuli Koivu, 2002. "Do efficient banking sectors accelerate economic growth in transition countries?," Macroeconomics 0212013, University Library of Munich, Germany.
    • Handle: RePEc:wpa:wuwpma:0212013
    Note: Type of Document - PDF; prepared on PC; pages: 24; figures: included
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    financial sector; transition economies; economic growth; panel data;
    All these keywords.

    JEL classification:

    • E - Macroeconomics and Monetary Economics

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