We study the relationship between financial development and economic growth across European regions, using a number of indicators (bank branches and headquarters, the value added by the financial sector and the presence of a stock exchange), synthetized by two summary measures: the capillarity of bank branches and the diversification of the financial industry. In order to establish a causal nexus, we adopt an instrumental variable approach based on the historical religious affiliations across European regions.
The results point to a positive nexus between financial development and economic growth, and demonstrate that what matters most is the presence of a diversified financial sector rather than the capillarity of bank branches. Our findings suggest that downsizing the number of bank branches would not necessarily have a detrimental effect on economic growth.
Published in 2022 in: Journal of Regional Science, v. 62, 2, pp. 389-411
