Finance and the sources of growth

This paper evaluates the empirical relation between the level of "nancial intermediary development and (i) economic growth, (ii) total factor productivity growth, (iii) physical capital accumulation, and (iv) private savings rates. We use (a) a pure cross-country instrumental variable estimator to extract the exogenous component of "nancial intermediary development, and (b) a new panel technique that controls for biases associated with simultaneity and unobserved country-speci"c e!ects. After controlling for these potential biases, we "nd that (1) "nancial intermediaries exert a large, positive impact on total factor productivity growth, which feeds through to overall GDP growth and (2) the long-run links between "nancial intermediary development and both physical capital growth and private savings rates are tenuous. ( 2000 Elsevier Science S.A. All rights reserved. JEL classixcation: G21; O16; O40