The finance-growth nexus in crisis

While the literature on the finance-growth nexus suggests a positive link between financial development and economic growth, another strand of literature highlights the crucial role of credit growth for the occurrence and strength of financial and economic crises. In this paper, we link the two seemingly contradicting strands of the literature by a strong and robust empirical finding: While financial development is indeed positively linked to GDP p.c. growth in normal, non-crisis times, larger financial sectors lead to significantly worse economic outcomes in the case of a banking crisis. (C) 2015 Elsevier B.V. All rights reserved.