Reassessing the impact of finance on growth, BIS Working Papers 381

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Reassessing the impact of finance on growth, BIS working paper 381 Name: Institution: Course: Tutor name: Date: December 10, 2013. Reassessing the impact of finance on growth, BIS working paper 381 Summary of main results Cecchetti and Kharroubi, authors of the article, offer a traditional theoretical underpinning to the relationship financial sector and economic growth that led to the perception that growth in the financial sector is directly proportional to economic growth…

Introduction

Even though growth in the financial sector is good, too much of it reduces its value and the study further notes that excessive growth is detrimental to the economy. Many theoretical assumptions, such as effects of growth in the financial sector on reducing costs, improving investments, and managing resource distribution and risks, may however downplay these positions. The real consequences of booms in the financial sector, like in other sectors, however become evident after a burst that follows a boom to support detrimental effects of growth in the financial sector. The empirical study into the report investigated 50 countries from both developed and developing economies over the past 30 years. Factors such as the ratio of private credit to GDP and the proportion of total employment that financial sector accounts for, measure the sector’s size while volume of credit growth, relative to GDP, measured financial sector development (Cecchetti and Kharroubi 2012, p. 1, 2). The average GDP-per-worker growth that private credit contributes is one of the indicator results to the effects of growth in the financial sector on the economy. ...
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