Posted by ugo panizza, unctad, on 26 October 2011
Readers may be interested in a VOXEU post in which we discuss the optimal size of the financial sector. We conclude that:
....the marginal effect of financial development on output growth becomes negative when credit to the private sector surpasses 110% of GDP. This result is surprisingly consistent across different types of estimators (simple regressions and semi-parametric estimations) and data (country-level and industry-level). The threshold at which we find that financial development starts having a negative effect on growth is similar to the threshold at which Easterly et al. 2000 find that financial development starts increasing volatility. This finding is consistent with the literature on the relationship between volatility and growth (Ramey and Ramey 1995) and that on the persistence of negative output shocks (Cerra and Saxena 2008).
The article is at the follwoing link:http://www.voxeu.org/index.php?q=node/6328