| This dissertation assesses the relationship between domestic financial structure and economic growth, and economic volatility. The issue of whether a bank-based or market-based financial system is better for an economy remains open to debate. Some suggest that financial structure does not matter to economic growth, while others suggest that diversification from a bank-based system can reduce the volatility of growth. Using ordinary least squares and instrumental variable models with panel data, I assessed four hypotheses. First, bank credit to private sector has a positive and significant impact on economic growth. Second, financial market activity has a positive and significant impact on the level of economic growth. Third, market-based financial systems have a greater positive impact on economic growth than bank-based systems. And fourth, market-based financial systems have a negative impact on the stability of growth.; I find that both bank and market activities are positively related to economic growth in general and more robust among developing countries than they are among developed countries. Using an expanded panel of data and controlling for bank-development, I find that bank-based financial structure generally has a negative impact on growth. However, the significance of the impact depends on the level of development and institutional factors (e.g. contract enforcement, corruption and property rights). Data strongly suggests that financial markets work relatively better than banks among developed countries, but there is no evidence to suggest that bank-based financial structure promotes or weakens economic growth among developing countries. Furthermore, there is strong evidence that bank-based systems increase the volatility of growth among developed countries, while some evidence suggests that bank-based systems decrease the volatility of growth among developing countries. I also find in a developing country that has high degree of corruption, a bank-based system may have a stabilizing effect on the economic growth. |
