Financial Systems and Economic Performance: A cross country analysis

Abstract

This paper empirically examines whether bank-based or market- based financial systems are better at promoting economic performance using a panel data set on 40 countries for the period 1990–2003. More specifically, we investigate whether financial structure and financial development are significantly correlated with the measures of economic perform ance such as capital accumulation, profit rate of capital and total factor productivity. Our main findings are that market-based financial system induces capital accumulation more efficiently whereas a bank-based and financially developed economy is more effective in promoting productivity. Further, bank-based system promoted capital accumulation in the past.Overall evidence suggests that financial structure does not matter for real economic performance while financial development does matter for high economic growth.