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Publicado en: Tesis Magíster

Impact of Financial Development on Economic Growth: An Empirical Assessement for Chile

Luis Ignacio Valenzuela.

Tesis, Magíster en Economía, IE-PUC, 2009.

This thesis evaluates whether Financial Development have had an impact on Chilean economic growth in the last thirty years and in which way. Following literature regarding the issue, the relation is evaluated for the main channels by which the financial sector is supposed to affect aggregated product: via Total Factor Productivity and via physical capital accumulation. Empirically, the former is tested using a Financial Development proxy in a typical aggregate production function where the proxy is included as a determinant of Total Factor Productivity. The latter channel is evaluated using the same proxy but in an investment function. Different variables are used as proxy for Financial Development, which different results, very likely representing how diverse is indeed the financial sector as each would be representing different aspects of it. Given the large literature (mainly cross-section) regarding the effects of the financial sector on economic activity and the practically inexistent empirical evaluation of this hypothesis for Chile, this study adds to the current literature about growth determinants for Chile. Results show that Financial Development does have an important effect of GDP via the TFP channel, but sector has to growth fast enough to give a clear boost on growth. There is a remaining uncertain growth component which is not easy to detect given large colinearities present in the data, effect that may partly come from the financial sector but also from other factors like education attainment. Regarding the physical capital accumulation, this does not to respond to any Financial Development indicators, although there could be some theoretical restrictions in this link given the inherent higher-frequency characteristics of the investment function. Still, results are robust to different specifications and indicators. Overall, this study supports existent empirical evidences in that Financial Development has a significant effect on GDP and that the most important channel for this is TFP.


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