The Nexus of Financial Development and Economic Growth - Impact on property prices

University essay from Lunds universitet/Nationalekonomiska institutionen

Abstract: This study investigates the negative effects generated from the nexus of financial development and economic growth. Through recent years have the financial sector escalated in ‘speed’ due to the high levels of financial integration which have in turn caused an effect of ‘too much finance’. The effect has been notice in the constant increase of property prices and hence private debt. In order to analyze the link closer and test if the increase in private debts and property prices is a main cause to low economic growth, this study has conducted a sample of 17 developed economies from 1985-2015. Furthermore, two different estimation methods have been applied. Method one have used a panel data model including country and time specific fixed effects in order to account for unobserved heterogeneity and cross-sectional dependence. For the second estimation, the method of Common Correlated Effects (CCE) as suggested by Pesaran (2006), have been used. The results imply that higher levels of debt (private and public) have a negative impact on economic growth, but the study could not tie the ‘too much finance’-effect with the increase in household debt and the low economic growth rates.

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