Financial Intermediation by Banks and Economic Growth: a Review of Empirical Evidence

This paper provides a review of empirical research on the link between financial intermediation by banks and economic growth. Special attention is paid to the issues of causality, non-linearity, time perspective, financial intermediation proxies, and interaction terms. The review shows that there are still quite a few unresolved issues in empirical research, which causes scepticism towards prioritizing financial sector policies in order to cause economic growth. Progress in the finance and growth literature is slow and researchers seem to go round in circles. A possibly fruitful direction for future empirical research is the relationship between government and banks, especially from the standpoint of political economy.