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


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

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. ...
The trend in effects of credit facilities is further consistent but not monotonic and the relationship between the two variables is significant, based on regression analysis results. Measuring the effects, using bank credit instead of total credit is an alternative measure and confirms the results, though with the turning point at 90 percent of GDP. Regression

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analysis confirms significance and the results note that some countries, especially developed countries, are above this level and therefore viable to adverse effects of growth in the economic sector. An almost similar trend of effects of financial sector growth on the economy is reported with the sector’s share of employment as an indicator. At low levels of the sector’s contribution to total employment, an increase in contribution has positive effects on economic growth but this starts to decline beyond some point. Regression analysis with controls identifies significance of the relationship. Most of the studied countries are however bellow the optimal level of the sector’s contribution to total employment at which its increase become detrimental. The real effects of financial sector growth on GDP is however negative. Growth in the sector, based on percentage contribution by employment, is inversely proportional to economic growth. Competition that the financial sector offers to the economy explains the results (Cecchetti and Kharroubi 2012, p. 2-16). The authors’ major assumption is that derived utility diminishes with level of supply. This is consistent with the law of diminishing marginal utility that explains a gradual decline in marginal utility with increase in supply. It develops the hypothesis that growth in the financial sectors does not induce economic growth after some level. The study


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…
Author : isom14
Reassessing the impact of finance on growth, BIS Working Papers 381 essay example
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