Alexander Hamilton argued in 1781 that "banks were the happiest engines that were ever invented"for spurring economic growth. Others disagree. President John Adams argued in 1819 that banks harm the "morality, tranquility and even wealth" of nations. Theoretical models also provide conflicting answers to the question whether financial intermediaries and markets foster or stymie economic growth, While previous research has shown an empirical relation between financial development and subsequent economic growth, this line of research assesses empirically whether financial development has a causal impact on economic development. This includes cross-country, firm-level studies and country studies. This research also analyzes whether financial intermediaries increase economic growth through better resource allocation and higher productivity growth or through faster capital accumulation. This is an important not just for academics interested in the determinants of economic development, but also for policy makers interested in fostering economic development.

 

Having established a causal impact of both financial intermediaries and financial markets, the discussion has recently turned to the determinants of an efficient and vibrant financial sector. Our research has focused both on specific policies as well as the historic determinants of financial development. Legal system efficiency is often named as one of the keys to a well-developed financial system, and our research tries to understand both the relation between legal traditions and financial development as well as the mechanisms of this relation.

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