BOFIT Discussion Papers, Institute for Economies in Transition, Bank of Finland
Do efficient banking sectors accelerate economic growth in transition countries
Abstract: The relationship between financial sector and economic
growth in transition countries has been largely ignored in the earlier
empirical literature. In this paper, we analyse the finance-growth nexus
using a fixed-effects panel model and unbalanced panel data from 25
transition countries during the period 1993-2000. We measure the
qualitative development in the banking sectors using the margin between
lending and deposit interest rates. Our second variable for the level of
financial sector development is the amount of bank credit allocated to the
private sector as a share of GDP. According to our results, the interest
rate margin is significantly and negatively related to economic growth.
This outcome is in line with theoretical models and has important policy
implications. On the other hand, a rise in the amount of credit does not
seem to accelerate economic growth. The main reasons behind this result
could be the numerous banking crises the transition countries have
experienced and the soft budget constraints that are still prevalent in
many transition countries. Due to these specific characteristics the growth
in credit has not always been sustainable and in some cases it may have led
to a decline in growth rates.
Keywords: financial sector; transition economies; economic growth; panel data; (follow links to similar papers)
28 pages, December 12, 2002
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