Understanding finance and growth models

Thorsten Beckis one of the leading financial economist. He along with Ross Leveine, Asli Demirguc Kunt  have devoted substantial time unravelling (and defending) financial systems role in various ways.

I came across this fantastic paper where Beck for a change shows how he analyses various issues related to finance. In this paper he discusses various models used to understand how finance helps in growth etc.

This paper reviews different econometric methodologies to assess the relationship between financial development and growth. It illustrates the identification problem, which is at the center of the finance and growth literature, using the example of a simple Ordinary Least Squares estimation. It discusses cross-sectional and panel instrumental variable approaches to overcome the identification problem.

It presents the time-series approach, which focuses on the forecast capacity of financial development for future growth rates, and differences-in-differences techniques that try to overcome the identification problem by assessing the differential effect of financial sector development across states with different policies or across industries with different needs for external finance. Finally, it discusses firm-level and household approaches that allow analysts to dig deeper into the channels and mechanisms through which financial development enhances growth and welfare, but pose their own methodological challenges.

Though, he tries his best to explain in English, it is slightly tough to grasp all the concepts. Anyways a nice reading on the various econometric models.

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