The Financial-Real Sector Nexus. Theory and Empirical Evidence.

Without doubt a well-developed financial sector is related to efficient resource allocation and growth, but there is modest consensus on the direction of that link, on the notion of what is meant by "well developed", on which subset of the financial market is crucial and thus which organisational set-up provides optimal returns for both architects and market participants alike. With sluggish growth, torn down market barriers and systemic change in the EU accession countries the direction, magnitude, sustainability, institutional set-up of the finance-growth nexus (and which), becomes one of the core issues of both macroeconomic theory and practice. This paper reviews the economic theory available, provides a well structured overview of 54 empirical studies conducted since 1964, sets the stage for constructing a data base encompassing the major three segments of financial markets (stock, bond and bank credit) and provides the methodological background for combining cross-country production function and time-series approaches in order to answer the following questions: (1) What is the direction of the finance-growth nexus, (2) which segment of the financial sector drives whatever nexus there is, and (3) what are the features of a growth supportive financial architecture.Series: EI Working Papers / Europainstitu