Charles Abuka, Ronnie Alinda, Camelia Minoiu, José-Luis Peydró, Andrea Presbitero, 29 June 2017

Existing studies suggest that the effects of monetary policy in developing countries on credit and the real economy are weak. This column challenges this view using rich loan-level credit register data from Uganda. It shows that monetary policy tightening significantly reduces credit supply – especially for banks with greater leverage and sovereign debt exposure – and identifies spillovers on inflation and economic activity. The effects are larger in more financially developed areas, highlighting the importance of financial development for policy effectiveness.

Thorsten Beck, Steven Poelhekke, 26 February 2017

The financial sector plays a critical role in intermediating domestic savings into domestic investment, so it should serve as an important absorption tool for natural resource windfalls. Using a panel dataset of over 150 developed and developing countries, this column argues that unexpected exogenous windfalls from natural resource rents are not intermediated. The findings are consistent with the negative long-term relationship between the reliance of a country on natural resources and financial sector development.

Ufuk Akcigit, John Grigsby, Tom Nicholas, 02 February 2017

A pressing issue facing policymakers around the globe today is how to generate long-term economic growth through technological innovation. Using a new dataset that matches 19th and 20th century patent records with census data, this column attempts to shed some light on the ‘golden age’ of US innovation. Population density and financial development are found to be important determinants of state innovativeness, while education appears to be the critical input at the individual level. These findings have important implications for innovation policy today.

Eilyn Yee Lin Chong, Ashoka Mody, Francisco Varela Sandoval, 17 January 2017

Recent research suggests a point beyond which the benefits of financial development diminish, and further development can even hurt growth. This column describes how a negative relationship between credit and growth emerged strongly after 1990 and was particularly pronounced in the Eurozone, consistent with the notion that an overgrown financial sector weakens economic growth potential. It also argues that slower growth leads to more rapid financial sector expansion. Policymakers need to be aware of the possibility that causality runs in both directions.

Thorsten Beck, 30 September 2015

The relationship between finance and growth has recently returned to the top of the policy research agenda, with several papers questioning earlier results indicating a positive link. This column suggests a different interpretation of the early findings. While there can be too much finance, as many countries have found out in recent crises, this does not imply that there is too much financial development.

Giuseppe Bertola, Anna Lo Prete, 28 February 2015

The large international imbalances accumulated in the Eurozone have proven difficult to unwind during the recent Crisis. This column argues that market reforms had a role in generating current account imbalances, and that patterns of relative labour market regulation could be equally important in the aftermath of the Crisis.

Joshua Aizenman, Yothin Jinjarak, Donghyun Park, 14 February 2015

The Global Crisis put to the fore the possibility that the relationship between financial development and output growth may be non-linear. This column presents new evidence on the issue using data on output growth of ten sectors from Latin America and East Asia. The authors find large differences between the two regions in terms of the impact of financial depth on sectoral growth, and validate the negative impact of financial deepening on output growth in several sectors. The results confirm that the impact of financial development on sectoral growth may indeed be non-linear – i.e. it may promote growth only up to a point. 

Giulia Bettin, Andrea Presbitero, Nikola Spatafora, 10 February 2014

Remittances are one of the most important financial flows to developing countries – more than three times the level of official development assistance. This column presents recent research on remittance flows from Italy. Their limited volatility and countercyclical behaviour with respect to macroeconomic conditions in the recipient country help mitigate developing countries’ vulnerability to external shocks. Better access to financial services for migrants can foster remittance flows.

Thorsten Beck, 27 October 2013

A well-functioning financial system is critical for economic growth. However, some studies find a negative relationship between the two at high levels of financial development. This column discusses why this is the case and suggests some policy implications. It argues that reforms that refocus the financial system on enterprise credit and on internalising the downside risks can be beneficial.

Meghana Ayyagari, Thorsten Beck, Mohammad Hoseini, 23 June 2013

Financial liberalisation has been controversial among academics and policymakers as it is not clear whom the benefits of expanded credit allocation accrue to. Using time and state-level variation across Indian states, this column finds strong evidence that financial deepening reduces rural poverty, especially among the self-employed. Financial deepening is also found to be associated with an inter-state migration trend from rural areas into the tertiary sector in urban areas.

Eduardo Cavallo, Carlos Scartascini, 12 May 2012

For some commentators, the recent financial crises are a sign that financial development has gone too far. Yet there are still countries where such concerns are the stuff of dreams. This column focuses on why the level of financial development in poor countries remains so low and what policymakers can do about it.

Ross Levine, 25 October 2011

Financial systems support and spur economic growth. But does financial innovation foster financial development? While recent innovations have done damage, this column says the long-run story is that financial innovation is essential for economic growth.

Nicola Gennaioli, Alberto Martin, Stefano Rossi, 17 November 2010

Recent sovereign defaults in developing countries have put severe strain on the defaulting country’s banking system. This column argues that these events teach us how the development of private financial markets plays a critical role in reducing the risk of government default and thus in supporting public borrowing.

Thorsten Beck, Chen Lin, Yue Ma, 13 October 2010

Can financial sector reform help bring informal firms into the formal sector? This column examines over 22,000 firms from 43 countries. Firms in countries with a credit registry are 20% less likely to evade taxes, and the tax evasion ratio in such countries is 11% lower.

Marc Quintyn, Geneviève Verdier, 23 September 2010

What do countries need for sustainable financial development? This column argues that protection of property rights is necessary but not sufficient. Using a sample of 160 countries from 1960 to 2005, it finds that checks and balances on power and political stability are the vital ingredients.

Giuseppe Bertola, Anna Lo Prete, 20 May 2010

Financial interconnectedness across countries has reached unprecedented levels – but what has driven this change? This column finds that financial deregulation is responsible for 16 percentage points of the increase in financial development, but openness to trade and the size of government off-set one another. This is because the structural association between trade openness and financial development is mildly negative.

Fabrizio Coricelli, 01 May 2010

Why have emerging economies weathered the crisis better than advanced countries? This column summarises a session given by Alan Winters, Saul Estrin, Thorsten Beck, and organised by Nauro Campos at the Royal Economic Society annual conference in March 2010. The contributions argue that the crisis may have long-lasting effects on migration, foreign direct investment, and financial development in Africa.

Thorsten Beck, Berrak Buyukkarabacak, Felix Rioja, Neven Valev, 09 July 2009

How does financial development affect macroeconomic outcomes? Previous studies have relied on aggregate measures. This column introduces a data set that distinguishes between lending to enterprises and households and investigates the consequences for economic growth, income inequality, and consumption smoothing.

Raghuram Rajan, Erik Berglöf, 10 October 2008

Financial institutions and sensible regulation have made great strides in emerging markets, but this column warns that the current crisis may cause emerging markets to re-enact internal battles for their economic souls that we thought had been conclusively decided. Developed country leaders should not fan the flames of anti-market sentiments.