Comments on “Optimal Financial Structures and Development” by

A. Demirguc-Kunt, E. Feyen, and R. Levine

Norman LoayzaJune 2011

The contribution

• In previous study, – financial structure NOT relevant for growth … for the

average country

The contribution

• In previous study, – financial structure is NOT relevant for growth … for

the average country

• In this study,– financial structure IS related with “economic activity”

BUT differently for different levels of GDP per capita– financial structure GAP does matter, even controlling

for banking and stock market

Comment 1: Endogeneity

1. Banks and stock markets lead to increase in GDP per capita … at different rates for different levels of development

Comment 1: Endogeneity

1. Banks and stock markets lead to increase in GDP per capita … at different rates for different levels of development

2. Economic development pushes the rise of banks and stock markets … at different rates for different levels of development

Comment 1: Endogeneity

1. Banks and stock markets lead to increase in GDP per capita … at different rates for different levels of development

2. Economic development pushes the rise of banks and stock markets … at different rates for different levels of development

• Both are sensible… yet “sensitivity” analysis denotes causation in the first sense

Comment 2: Financial Structure Gap

• The gap is estimated using OECD countries

Comment 2: Financial Structure Gap

• The gap is estimated using OECD countries• It is only natural, then, that the regression fit

of the financial structure ratio be better for richer countries

010

2030

e(Fi

nanc

ial S

truc

ture

Rat

io|X

)

-6 -4 -2 0 2e(Log of GDP per capita|X)

Rest of the sample OECD CountriesFitted values

Comment 2: Financial Structure Gap

• The gap is estimated using OECD countries• It is only natural, then, that the fit of the

financial structure ratio be better for richer countries

• Then, by construction, the FS gap is linked to GDP per capita

Comment 2: Financial Structure Gap

• The gap is estimated using OECD countries• It is only natural, then, that the fit of the

financial structure ratio be better for richer countries

• Then, by construction, the FS gap is linked to GDP per capita

• Need to use criteria other than income for choosing the sample to derive optimal financial structure

Question 1

• Why not growth?– “Economic activity” in the paper is

represented by GDP per capita levels– In previous work, it had been the growth

rate of GDP per capita– When using conditioning set, GDP per

capita in 1980 is used as regressor. Still…

Question 2

• In the quantile regressions, why including only one regressor?– Both Private credit and Stock market value in the

(first set of ) quantile regressions for GDP per capita

Comments on “Optimal Financial Structures and Development” by

A. Demirguc-Kunt, E. Feyen, and R. Levine

Norman LoayzaJune 2011