We analyze the role that human capital plays in driving the non-monotonic relation between economic growth and financial development. At this aim we build a theoretical model of endogenous growth in which the nature of the growth and finance nexus is nonlinear and actually depends on the educational level, which ultimately determines the way through which financial development affects both the productivity and the depreciation of human capital. The dependence of the non-monotonic (i.e., bell-shaped) growth and finance nexus on human capital suggests that there may exist a threshold education level beyond which the sign of the relation changes. We econometrically test such a theoretical prediction in a rich and large data set comprising a cross-section of 133 countries over the period 1970-2011. We rely on the GMM instrumental variable approach to address endogeneity issues, and we consider a large number of control variables. After performing a number of robustness checks, all our results are consistent with the view that human capital helps to explain the nonlinear relationship between finance and growth. In particular, we find support for our theoretical model’s conclusion that financial development may be harmful to economic growth in countries that already have high levels of education, while it may be beneficial in those countries in which human capital is less abundant.

On the nonlinearity of the finance and growth relation: The role of human capital / A. Bucci, S. Marsiglio, B. Diallo. - Tor Vergata Roma : Centre for Economic and International Studies Faculty of Economics - University of Rome "Tor Vergata", 2023 Nov 20. (CEIS RESEARCH PAPERS)

On the nonlinearity of the finance and growth relation: The role of human capital

A. Bucci;S. Marsiglio;
2023

Abstract

We analyze the role that human capital plays in driving the non-monotonic relation between economic growth and financial development. At this aim we build a theoretical model of endogenous growth in which the nature of the growth and finance nexus is nonlinear and actually depends on the educational level, which ultimately determines the way through which financial development affects both the productivity and the depreciation of human capital. The dependence of the non-monotonic (i.e., bell-shaped) growth and finance nexus on human capital suggests that there may exist a threshold education level beyond which the sign of the relation changes. We econometrically test such a theoretical prediction in a rich and large data set comprising a cross-section of 133 countries over the period 1970-2011. We rely on the GMM instrumental variable approach to address endogeneity issues, and we consider a large number of control variables. After performing a number of robustness checks, all our results are consistent with the view that human capital helps to explain the nonlinear relationship between finance and growth. In particular, we find support for our theoretical model’s conclusion that financial development may be harmful to economic growth in countries that already have high levels of education, while it may be beneficial in those countries in which human capital is less abundant.
20-nov-2023
Economic Growth; Financial Development; Human Capital
Settore SECS-P/01 - Economia Politica
https://ceistorvergata.it/ceis-research-papers/36-806/on-the-nonlinearity-of-the-finance-and-growth-relation-the-role-of-human-capital
Working Paper
On the nonlinearity of the finance and growth relation: The role of human capital / A. Bucci, S. Marsiglio, B. Diallo. - Tor Vergata Roma : Centre for Economic and International Studies Faculty of Economics - University of Rome "Tor Vergata", 2023 Nov 20. (CEIS RESEARCH PAPERS)
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Utilizza questo identificativo per citare o creare un link a questo documento: https://hdl.handle.net/2434/1021349
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