Insurance, Banking and Economic Growth. Do Insurance and Banking Create Synergies that Affect Economic Growth? PDF
By:Benjamin Merz
Published on 2016 by
The financial sector affects economic growth through various channels, such as mobilization and pooling of savings, risk diversification and risk management and corporate governance. The interaction between banks and insurance companies in their effects on economic growth is ambiguous in current theory. Using a data sample of 86 countries across the 1995 to 2014 time period, we employ a dynamic system generalized method of moments (GMM) regression in order to evaluate how the financial sector affects growth and how the insurance and banking sectors interact with regard to economic growth. This is a novel contribution because we include an interaction term in our study and classify countries into different cohorts in order to find the effects for countries in different stages of economic development. Insurance companies and banks are found to be substitutes rather than complements, but the overall positive growth effects of the financial sector outweigh the substitutionary effect up to a certain relative size of the financial sector. When the financial sector reaches this inflection point the negative effect of the interaction between insurance and banking becomes dominant, which results in overall negative effects on economic growth. The substitution effect is clearly evident in developed countries and evident to a lesser extent in developing countries. The findings suggest that the financial sector should be kept at a certain size relative to the size of the economy as a whole. It is out of the scope of this research to indicate the ideal size of the financial sector as a whole and the share of banking and insurance within the sector. Possible drivers for the effect are discussed, but clear identification of these factors remains a subject for future research.
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