Update: Too Much Finance?
Following this post from a couple of weeks ago, Niall McGeever pointed out to me a recent paper on this theme by John Cochrane in the Journal of Economic Perspectives. Then Enrico Berkes from the IMF sent me a copy of his IMF working paper, which is entitled 'Too Much Finance'. This is a fascinating paper - you can see the VoxEU summary here. The paper's abstract is:
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.