Year of Publication

2012

Degree Name

Doctor of Philosophy (PhD)

Document Type

Doctoral Dissertation

College

Agriculture

Department

Agricultural Economics

First Advisor

Dr. David Freshwater

Abstract

There is a broad literature on the finance-growth nexus in the macroeconomics literature. Is there evidence for the finance-growth nexus at the sub-national region? If so, can macroeconomic finance and growth methods be extended to sub-national regions? Joseph Schumpeter argued that banks promote economic growth by choosing which projects to fund, by mobilizing underutilized capital, by managing risk and by monitoring managers.

This dissertation proposes a modified Martin and Ottaviano (2001) model that allows for borrowing to form new firms or to expand existing firms. The model shows that if borrowing across regional lines is costly, above and beyond the normal interest rate, that new firm formation will tend to agglomerate in the more financially developed region.

With this theory in hand, the dissertation goes on to test the effects of bank deposits on earned income in Kentucky counties. Using equation-by-equation and simultaneous equations panel data methods, this dissertation shows that there is a strong correlation between the size of the bank deposits in a county and income growth. Since Kentucky counties are small and economically interconnected, spatial autocorrelation tests are applied with the result that there are pockets within Kentucky where incomes are spatially correlated. Spatial panel estimates are then conducted to correct for spatial autocorrelation. These results show a strong correlation between deposits and income growth.

This dissertation contributes to the literature in three ways. First, it proposes a model that ties endogenous growth, the New Economic Geography and the finance-growth nexus together in a Neo-Schumpeterian context. Second, it gives evidence for the finance-growth nexus in Kentucky counties under methods similar to those used in macroeconomics. Third, the dissertation suggests a way forward in performing future analysis of the finance-growth nexus in a sub-national context.

Overall, this dissertation finds evidence to support the hypothesis that the size of the banking industry in a given county positively influences earned income growth. There is also evidence that having a large banking industry in a neighboring county has a positive spillover effect on earned income. Further estimates to control for endogeneity find evidence that the effect of deposits on income growth is stronger than the effect of income growth on deposits.

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