Finance, Growth, and Fragility

Abstract

We use indicators from the Global Financial Development Database to identify the effects of financial fragility on the finance-growth nexus for the period from 2000 to 2014. Regressions on our cross-country sample show that financial fragility and increased private credit have negative effects on growth. This result is robust to controlling for systemic banking crises that indicate the negative effects remain whether these crises materialize or not. The results show that regulations to clean up balance sheets by addressing impaired loans could make banks more resilient to future shocks and revitalize the virtuous cycle between finance and growth.