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Non-linearity in the Finance-Growth Nexus: Evidence from Indonesia

This paper investigates the finance-growth nexus where bank credit is decomposed into investment, consumption, and working capital credit. From a panel dataset of provinces in Indonesia, it documents that higher financial development measured by financial deepening and financial intermediation exhibits an inverted U-shaped relationship with economic growth. This non-linear effect of financial deepening is driven by both investment credit and consumption credit. These results suggest that too much investment credit and, to a lesser extent, consumption credit are detrimental to economic growth. Ultimately, only financial intermediation associated with working capital credit has a positive and monotonic impact on economic growth.

15. August 2017

Authors Wahyoe Soedarmono Iftekhar Hasan Nuruzzaman Arsyad

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Professor Iftekhar Hasan, PhD
Professor Iftekhar Hasan, PhD
Economist

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