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Three Essays on Financial Intermediation and Growth

Ray Chaudhuri, Ranajoy
http://rave.ohiolink.edu/etdc/view?acc_num=osu1338394730

Abstract Details

2012, Doctor of Philosophy, Ohio State University, Economics.
My dissertation explores the impact of financial development, as well as regulatory changes in the financial sector, on economic growth. Recent literature on growth has often focused on the importance of financial intermediation and institutional quality. Advocates of financial development say that the development of the banking sector and stock markets increase the financing available to firms, raising productivity. The “institutions hypothesis” proponents suggest that institutions jointly determine the growth rate and the policy choice, while policies themselves bear no causal connection to growth. Such hypothesis is difficult to test empirically because the change in institutional quality is, with a few historic exceptions, very slow. For the most part, therefore, a country’s economic performance can end up being attributed to a random cause. Using a cross-country data set and numerous financial indicators, institutional quality variables and growth measures, I find that this is not true of financial development. Financial variables have a significant effect on growth that is distinct from that of institutions like private property and rule of law. I also consider this issue in the context of the fifty U.S. states. States differ with respect to financial indicators like the number of banks, assets, equity, loans and deposits. They also vary in terms of their regulatory environments. States like Delaware, Texas and Nevada have very high scores for economic freedom; Mississippi, New Mexico and West Virginia have very low ones. The results again underscore the importance of financial deepening in order to achieve economic growth. Taking up from this point, the final essay studies the impact of U.S. banking deregulation on growth. Many states relaxed restrictions on intra-state bank branching beginning in the early 1960s, both by allowing bank holding companies to convert subsidiaries into branches and by permitting statewide de novo branching. This increased competition in the banking sector forced banks to become more efficient. The existing literature suggests that one of the channels through which this worked was bank lending. Different industries have varying degrees of dependence on external financing, and industries that have greater dependence should grow faster in the post-deregulation period. Using a panel data set, I find this not to be the case for the U.S.; industries that borrow less from banks actually grew at a faster rate after deregulation. This could reflect commercial banks losing market share to other sources of external financing, the general decline in the U.S. manufacturing sector and the terms of trade moving in favor of agriculture. I also consider the effect of deregulation on various banking indicators and find the strongest impact to be on the number of commercial banks operating in the state. Contrary to existing research, these regulatory changes slowed down growth in the number of bank branches and offices, as well as other measures of bank performance like assets, equity, loans and deposits. This suggests that the gains from deregulation are short-lived, and also indicate unprofitable smaller banks shuttering their operations and the emergence of credit unions and other alternatives to commercial banks.
Paul Evans (Advisor)
Huston McCulloch (Committee Member)
Robert de Jong (Committee Member)
156 p.
Banking; Economics; Finance
Economic Growth; Banking; Deregulation; Financial Development; Institutions

Recommended Citations

Citations

  • Ray Chaudhuri, R. (2012). Three Essays on Financial Intermediation and Growth [Doctoral dissertation, Ohio State University]. OhioLINK Electronic Theses and Dissertations Center. http://rave.ohiolink.edu/etdc/view?acc_num=osu1338394730

    APA Style (7th edition)

  • Ray Chaudhuri, Ranajoy. Three Essays on Financial Intermediation and Growth. 2012. Ohio State University, Doctoral dissertation. OhioLINK Electronic Theses and Dissertations Center, http://rave.ohiolink.edu/etdc/view?acc_num=osu1338394730.

    MLA Style (8th edition)

  • Ray Chaudhuri, Ranajoy. "Three Essays on Financial Intermediation and Growth." Doctoral dissertation, Ohio State University, 2012. http://rave.ohiolink.edu/etdc/view?acc_num=osu1338394730

    Chicago Manual of Style (17th edition)

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This open access ETD is published by The Ohio State University and OhioLINK.