The Finance-Growth Nexus: Evidence from Bank Branch Deregulation

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Research Papers

The Finance-Growth Nexus: Evidence from Bank Branch Deregulation

June 1995 Number 9513

JEL classification: G2, L5

Authors: Jith Jayaratne and Philip Strahan

This paper provides evidence that financial markets can directly affect economic growth by studying the relaxation of bank branch restrictions in the United States over the past 25 years. We find that the rates of real, per-capita growth in income and output increase significantly following intrastate branch reform. We also argue that the observed changes in growth reflect causality flowing from financial sector reform to improved growth performance. This argument is supported by evidence from the process of branching deregulation, from the timing of such policy changes, and from bank lending following branch reform. Moreover, the particular financial sector policy experiment studied here leads to faster growth by improving the quality of bank lending.

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