Finance and the sources of growth

This paper evaluates the empirical relation between the level of financial intermediary development and (i) economic growth, (ii) total Factor product ivity growth, (iii) physical capital accumulation, and (iv) private savings rates. We use (a) a pure cross-country instrumental variable estimator to extract the exogenous component of financial intermediary development, and (b) a new panel technique that controls for biases associated with simultan eity and unobserved country-specific effects. After controlling for these p otential biases, we End that(1) financial intermediaries exert a large, pos itive impact on total factor productivity growth, which feeds through to ov erall GDP growth and (2) the long-run links between financial intermediary development and both physical capital growth and private savings rates are tenuous. (C) 2000 Elsevier Science S.A. All rights reserved. JEL classifica tion: G21; O16; O40.