Financial intermediation and growth: Causality and causes

This paper evaluates (1) whether the exogenous component of financial inter mediary development influences economic growth and (2) whether cross-countr y differences in legal and accounting systems (e.g., creditor rights, contr act enforcement, and accounting standards) explain differences in the level of financial development. Using both traditional cross-section, instrument al variable procedures and recent dynamic panel techniques, we find that th e exogenous components of financial intermediary development is positively associated with economic growth. Also, the data show that cross-country dif ferences in legal and accounting systems help account for differences in fi nancial development. Together, these findings suggest that legal and accoun ting reforms that strengthen creditor rights, contract enforcement, and acc ounting practices can boost financial development and accelerate economic g rowth. (C) 2000 Published by Elsevier Science B.V. All rights reserved. JEL classification: O16; O40; G28.