The Environmental Kuznets Curve: Is There a Financial Analogue?

The objective of this chapter is to introduce the concept of the financial Kuznets curve (FKC) as an analogue to the already well-established notion of the environmental Kuznets curve (EKC). It is envisaged that the FKC can be introduced on the grounds that too much of a good thing is not good and that countries with large financial sectors are more susceptible to financial crises. The empirical results, based on a variety of econometric techniques, show that the adverse effect of financialization on growth materializes only at high levels of financialization as measured by the ratio of credit to GDP. This is why the FKC, which symbolizes the “finance curse” resulting from over-dependence on the financial sector, can be observed only in the case of high-income OECD countries, which have high levels of financialization.