Do financial systems spur economic growth in the USA? An empirical investigation

Abstract

In this paper, we use the autoregressive distributed lag (ARDL) bounds testing approach to examine the dynamic impact of both bank-based financial development and market-based financial development on economic growth in the United States of America during the period 1980 to 2012. In order to adequately capture the depth and width of the USA’s financial system, we used both bank-based and market-based financial development indices as proxies for bank-based and market-based financial systems. These indices were constructed from a number of bank- and market-based financial development indicators, using the method of means-removed average. Our empirical results reveal that both bank-based and market-based financial development have a positive impact on economic growth in the USA. These results apply irrespective of whether the regression analysis is conducted in the long-run or in the shortrun. We, therefore, recommend that both pro-bank-based and pro-market-based financial sector development policies should be pursued in the USA – in order to bolster real sector growth and economic development.