Learning from Biodiversity: Is Diversity in Financial Ecosystems Important for Economic Growth and Stability?

Authors:: Vihang R. Errunza, Basma Majerbi and Maxwell Tuuli

Publication: IMF Economic Review, Forthcoming

We develop a new measure of financial system diversity inspired from biodiversity research and explore its potential benefits for growth and stability. For a sample of 61 countries, we find that diversity in financial ecosystems differ widely across countries and over time. Our evidence shows that diversity has a significant growth enhancing effect that is robust to model specification and other financial development controls. Diversity also mitigates the negative effect of systemic banking crises on growth. Our results suggest that financial policies that promote diversity could be another powerful tool to improve resilience and stability while promoting sustainable growth.