The role of nonlinearity on the financial development–economic performance nexus: an econometric application to Italian banks

Using data for Italian banks over the 2001–2012 period, we assess the existence of a nonlinear relationship between finance and growth, through the application of alternative measures of financial development. We show that both branch density and aggregate credits over GDP positively contribute to economic performance. While the relationship between branch density and economic activity is shown to be monotonic, an inverted U-shape is found once aggregate credits to GDP are employed as the main measure of financial development. Evidence presented in this paper further reveals that concentrated markets, that is, monopolistic and oligopolistic markets, facilitate economic growth, especially when credits to GDP are employed. Several robustness checks confirm our findings.