Further Statistical Debate
A subsequent study from another international financial organization arrived at statistical findings with even more astonishing implications: For OECD countries, additional financial depth uniformly reduces growth.
In the main results of two researchers at the OECD (Cournede and Denk 2015), cross-country growth equations show a strictly negative coefficient on a linear variable for financial depth (ratio of private credit to GDP) without any quadratic term. If these results were taken literally, there would be a radical policy implication: Growth would be maximized by completely eliminating credit finance. The optimal amount of credit would be zero. The authors do conduct supplementary tests that suggest the influence of finance on growth is positive at initially low levels of finance, and this enables them to state in their abstract: “...finance has been a key ingredient of long-term economic growth in OECD and G20 countries over the past half-century....” But they then assert that “at current levels of household and business credit further expansion slows rather than boosts growth” (p. 3). However, they seek to support this conclusion on the basis of the strictly linear negative coefficient that is estimated for the full sample, including low-financial-depth observations, and that test inescapably implies that the optimal level of finance is zero. The authors cannot reject the fully linear results when it comes to the implication of optimal zero finance but at the same time use them as the basis for asserting that at “current levels” the impact of additional finance on growth is strictly negative. The authors' (proper) insistence on a positive growth influence of finance over an initial range seriously undermines the usefulness of their main estimates.More fundamentally, even if attention is restricted to a range of private credit above, say, 60 percent of GDP, there is a major problem regarding causality.
Higher per capita income is likely to drive relatively more demand for credit as, in effect, a luxury good. If so, when combined with the long-recognized “convergence” pattern of lower growth at higher per capita incomes, the effect will be that higher credit is observed to accompany lower growth but without causality. Reduction of credit would thus not boost growth because high credit is not causing low growth; instead, the maturing of the economy is slowing growth.It turns out, moreover, that the study's main statistical finding does not hold up to certain key changes in specification. The analysis below uses the same dataset as Cournede and Denk (2015), kindly provided by the authors, to examine this question.[216] The central findings here are that the results of that study are unreliable because, first, the tests exclude the most important variable, real per capita income at purchasing power parity comparable across countries; second, the tests apply country fixed effects and thereby throw out important information on cross-country variation; and third, incorporation of shift and slope dummy variables for lower financial depth removes the significance of the negative influence of higher financial levels on growth while tending to confirm the expected positive influence at low levels.
Table 6.1 Cournede and Denk estimates for three specifications of regressions for per capita GDP growtha
| Variable | Annual | Annual | Five-year averages |
| Private credit (percent of GDP) | -0.031 (-6.2) | -0.019 (-2.1) | -0.019 (-3.2) |
| Investment rate | 0.254 (5.0) | 0.131 (2.8) | |
| School years | 0.222 (0.5) | -0.448 (-2.0) | |
| Population growth | -0.710 (-1.9) | 0.025 (0.09) | |
| Ln (lagged national GDP per capita) | bgcolor=white>-2.029 (-1.7) | ||
| Bank crisis dummy | -1.183 (-2.5) | ||
| Year fixed effects | No | Yes | Yes |
| Country trend | No | Yes | No |
| R-squared | 0.183 | 0.52 | 0.652 |
| Period | 1961-2011 | 1970-2011 | 1961-2010 |
| Observations | 1,303 | 1,115 | 238 |
a.
Ordinary least squares estimates for 33 OECD countries (excluding Chile due to incomplete data). T-statistics in parentheses. All tests have country fixed effects.
Source: Cournede and Denk (2015, 16 and 21).
More on the topic Further Statistical Debate:
- Further Statistical Debate
- KEY EQUATIONS
- KEY EQUATIONS
- Principles of Money Supply Determination
- References
- CONCLUSION AND AVENUES FOR FURTHER RESEARCH
- Population Dynamics
- C Further Criticisms of Popper and Platt (Optional)
- DYADIC LEVEL OF SOCIAL AGGREGATION
- Normative Choices