Financial development and economic growth: New evidence from Mexican States

Abstract

This paper investigates whether bank credit extended to the non-financial private business sector may be boosting regional economic growth in Mexico. For this purpose, a panel of annual data by state for the period 2005–2018 was constructed and dynamic model estimations were carried out using the Generalized Method of Moments (GMM). The results suggest that increases in the level of bank credit extended to private non-financial firms increased the state´s GDP per capita growth, a result consistent with the emphasis in Mexico – and internationally – regarding the need to promote policy measures that stimulate the healthy development of a country’s financial system. Furthermore, the research offers some counterfactuals to analyze the effect on a state’s GDP per capita growth rate when it moves from a lower to a higher quartile within the CREDIT allocation. This analysis is therefore expected to reveal more information about the systemic efficiency of the banking system and better capture the contractual relationships between banks and their clients, something that is impossible to obtain from country-level data from international studies.