Too Much Finance?

Abstract

This paper examines whether there is a threshold above which financial development no longer has a positive effect on economic growth. We use different empirical approaches to show that there can indeed be too much finance. In particular, our results suggest that finance starts having a negative effect on output growth when credit to the private sector reaches 100% of GDP. We show that our results are consistent with the vanishing effect; of financial development and that they are not driven by output volatility, banking crises, low institutional quality, or by differences in bank regulation and supervision.