An Empirical Inquiry into the Development of Financial Structures and Economic Growth

This work contributes to the literature in comparative financial macroeconomics focusing on empirical evaluations of financial structures and economic growth with a secondary emphasis on corresponding appropriate public policy measures.;A study of the indicators of financial structure was carried out for 210 countries over the period of 1960-2009. The study used Principal Components Analysis to reduce the dimensionality of the structures while retaining the explanation of maximum variations. The study then separately performed a cross-sectional analysis on the original dataset to examine the relationship of the indicators of the financial structure with respect to economic growth. Those indicators were deemed either robust or fragile after a robustness check using a variant of Levine and Renelt's Extreme Bounds Analysis. Lastly, Partial Least Squares were used to determine which indicators were the best predictors for explaining both economic growth and changes in the financial structures.;Principal Components Analysis reveals that private credit, bank deposits, other financial assets, liquid liabilities and non-life insurance explained the maximum variation. Liquid liabilities were nearly perfectly correlated with financial system deposits. Non-life insurance had a very low correlation with life insurance so the two variables could be combined. Furthermore, stock, public bond and private bond markets capitalizations’ had very low inter-correlations.;The Cross-Sectional Analysis with Extreme Bounds reveals, in the most restrictive of all models that bank deposits, bank assets, other financial assets, financial system deposits, liquid liabilities, private credit and liquidity were the positive robust indicators. Life insurance premiums were also found to be robust and positive. Bank concentration, bank income derived from interest earned, overhead and public bonds were robust with negative coefficients. Bank’s return on equity and assets as well as their cost-income ratios were barely fragile and negative. Last critical points of consideration in these analyses were that trade openness and initial primary schooling variables were robust and positive while population growth rate was robust and negative. The initial GDP per capita was robust and negative providing further evidence of conditional convergence. Government’s share in real GDP per capita and inflation rate were not statistically significant or robust.;Combining the two research goals, Partial Least Squares reveals that liquid liabilities, private credit, bank deposits, bank assets, public bond markets, other financial assets, life insurance premiums and international debt were considered important predictors of economic growth. Among the other explanatory determinants of growth, population growth rate, investments (as mapped by both investment’s share in real GDP per capita and growth rate of new capital accumulation) and trade openness were estimated to be very important variables. Inflation rate was considered important only with imputed estimates and once again, government’s share in real GDP per capita and taxes were not considered important with respect to the dual mandates of this methodology.