Beyond financial deepening. Rethinking the finance-growth relationship in an uneven world

Following the debate on the limits to financial deepening, we re-assess the finance-growth relationship employing a broad-based measure of financial development and controlling for the stability-enabling features of financial environments. We show that the marginal effect of financial development on growth differs for economies with uneven long-run growth patterns. We first identify endogenously multiple convergence clubs for a large panel of countries over 1995–2017; then, based on ordered logit estimations, we show that the probability of approaching a higher growth path, when the level of financial development is raised, depends on economies’ initial income, availability of skills, and institutions. Finally, running panel regressions we find that the marginal effect of financial development on growth is negative for high-income financially mature economies, positive for follower economies, insignificant for countries in low-growth traps. Overall, financial development spurs growth when economies take steps to enhance the inclusiveness, efficiency, and resilience of financial systems.