Growth, Savings, Financial Markets and Markov Switching Regimes

We report evidence that the relation between the nancial sector share, private savings and growth in the United States 1948 1996 is characterized by several regime shifts. The nding is based on vector autoregressions on quarterly data that allow for Markov switching regimes. The evidence may be interpreted as support for a hypothesis that the relation between nancial development and growth evolves in a stepwise fashion. Theoretical models where nancial market extensions entail xed costs imply such stepwise patterns. The estimated variable relations are roughly consistent with the patterns to be expected from such models, although our data do not admit de nite conclusions. The timing of the shifts coincides with regulatory changes and changes in the nancial market structure.