Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/322247 
Year of Publication: 
2025
Series/Report no.: 
LEM Working Paper Series No. 2025/24
Publisher: 
Scuola Superiore Sant'Anna, Laboratory of Economics and Management (LEM), Pisa
Abstract: 
This paper studies the finance-growth nexus in historical perspective. We employ a panel data model with interactive fixed effects and time-varying coefficients for a sample of advanced economies since the late 19th century. The model considers flexible specifications of heterogeneity and accounts for global common shocks that have likely shaped the finance-growth nexus over time. We present three main sets of results. First, our empirical analysis shows that the relationship between finance and growth is time-varying. Using our benchmark model, we estimate the time-varying slope coefficient of financial development and show that the finance-growth nexus has secularly evolved, thus challenging the mainstream assumption of a uniform association over time. Second, by accounting for global common shocks and their heterogeneous impact, we challenge the dominant narrative suggesting a consistently positive contemporaneous relationship between financial development and economic growth. Third, differences emerge when we distinguish between Schumpeterian finance (bank credit growth) and a more speculative type of finance (stock market growth). While both exhibit time-varying behaviors, the empirical evidence points to a substantially stronger and positive association between bank credit growth and economic growth, as opposed to stock markets, which tend to display a weaker or even negative relationship. Our results remain robust when we account for a range of alternative specifications and potential sources of variation.
Subjects: 
Finance-growth nexus
Financial development
Economic growth
Semiparametric methods
Time-varying estimates
Long-panel
JEL: 
C14
E44
N20
O16
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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