Bank Competition, Economic Growth, and Nonlinearity: A Nonparametric Approach

AuthorGeorg Man
Publication Date01 July 2015
Date01 July 2015
Georg Man*
This article asks empirically the question about potential nonlinearities in the
link between bank competition and aggregate economic growth in a cross-section
of countries. I employ nonparametric methods, primarily kernel estimation, and
several measures of banking competition. The results suggest that while the data
show the presence of relevant nonlinearities, the available evidence provides only
limited support for nonmonotonicities such as inverted u-shapes, and so contrasts
with previous findings obtained using parametric methods. This study corrobo-
rates the traditional view, according to which more bank competition fosters
growth, with presumed implications for policy.
Does bank competition affect economic growth? If so, what is the shape of
this relationship? Given the role of banks in the recent financial crisis and its
impact on the real macroeconomy, multi-billion government involvement on
both sides of the Atlantic, and the public debate about growth, banking, and
competitiveness, these questions are intriguing and of high-current relevance.
Theoretical arguments can be made for and against a growth-enhancing
impact of competition among banks, so that the overall effect on the macroec-
onomy could well be ambiguous and take on various shapes.
Inspired by recent events and theoretical arguments, the specific question I am
asking in this article is the following: is the empirical relationship between bank
competition and aggregate economic growth nonlinear, and what is the shape of
this relationship? I answer this question by analyzing a cross-section of countries
for the time span 19882007. To my knowledge, this is the first contribution in
this area focusing explicitely on nonlinearities and employing the nonparametric
estimation methodology which iswell-suited for the question at hand.
Aghion et al. (2005) demonstrate theoretically and empirically the presence of nonlineari-
ties in the link between product market competition and innovation resp. growth, using
nonparametric methods. One may therefore suspect that similar nonlinearities also exist
in financial markets, although the underlying economic mechanisms will be different,
Scottish Journal of Political Economy, DOI: 10.1111/sjpe.12076, Vol. 62, No. 3, July 2015
©2015 Scottish Economic Society.

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