| Abstract: |
This paper reviews different econometric methodologies to assess the
relationship between financial development and growth. It illustrates the
identification problem, which is at the center of the finance and growth
literature, using the example of a simple Ordinary Least Squares estimation.
It discusses cross-sectional and panel instrumental variable approaches to
overcome the identification problem. It presents the time-series approach,
which focuses on the forecast capacity of financial development for future
growth rates, and differences-in-differences techniques that try to overcome
the identification problem by assessing the differential effect of financial
sector development across states with different policies or across industries
with different needs for external finance. Finally, it discusses firm-level
and household approaches that allow analysts to dig deeper into the channels
and mechanisms through which financial development enhances growth and
welfare, but pose their own methodological challenges. |