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

Deutsche Bundesbank Banking and Financial Studies Discussion Paper No. 02/2006

25 Pages Posted: 17 Jun 2006

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: February 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 may suffer from the disadvantage that systematic differences between markedly different economies could drive the result that finance matters. Therefore, we suggest an alternative to measure the quality of banks' financial intermediation and focus on the regions of one economy only: Germany. To approximate the quality of financial intermediation we use bank efficiency estimates estimated at the firm-level. 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, intermediation quality, regional growth, efficiency

JEL Classification: G21, O16, O47, O52, R11, R51

Suggested Citation

Koetter, Michael and Wedow, Michael, Finance and Growth in a Bank-Based Economy: Is it Quantity or Quality that Matters? (February 2006). Deutsche Bundesbank Banking and Financial Studies Discussion Paper No. 02/2006, Available at SSRN: https://ssrn.com/abstract=909561 or http://dx.doi.org/10.2139/ssrn.909561

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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