Finance and Growth in a Bank-Based Economy: Is it Quantity or Quality that Matters?

40 Pages Posted: 8 Jun 2016

See all articles by Michael Koetter

Michael Koetter

Halle Institute for Economic Research

Michael Wedow

European Central Bank (ECB) - Directorate Financial Stability and Supervision

Multiple version iconThere are 2 versions of this paper

Date Written: 2006

Abstract

With this paper we seek to contribute to the literature on the relation between finance and growth. We argue that most studies in the field fail to measure the quality of financial intermediation but rather resort to using proxies on the size of financial systems. Moreover, cross-country comparisons suffer from the disadvantage that systematic differences between markedly different economies may drive the result that finance matters. To circumvent these two problems we examine the importance of the quality of banks' financial intermediation in the regions of one economy only : Germany. To approximate the quality of financial intermediation we use cost effciency estimates derived with stochastic frontier analysis. We find that the quantity of supplied credit is indeed insignificant when a measure of intermediation quality is included. In turn, the efficiency of intermediation is robust, also after excluding banks likely to operate in multiple regions and distinguishing between different banking pillars active in Germany.

Keywords: Finance-growth nexus, financial intermediation, regional growth

JEL Classification: R11, G21, O4, G28

Suggested Citation

Koetter, Michael and Wedow, Michael, Finance and Growth in a Bank-Based Economy: Is it Quantity or Quality that Matters? (2006). Bundesbank Series 2 Discussion Paper No. 2006,02, Available at SSRN: https://ssrn.com/abstract=2793976

Michael Koetter (Contact Author)

Halle Institute for Economic Research ( email )

P.O. Box 11 03 61
Kleine Maerkerstrasse 8
D-06017 Halle, 06108
Germany

HOME PAGE: http://www.iwh-halle.de/en/about-the-iwh/people/detail/michael-koetter/

Michael Wedow

European Central Bank (ECB) - Directorate Financial Stability and Supervision ( email )

Frankfurt a.M.
Germany

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