xxviii Editors’ Introduction
different kinds of data that have been used and an assessment of the econometric
problems that have arisen and how they have been solved; the conclusion evaluates
the current state of growth econometrics, and suggests directions for future
research.
A concern that has long antecedents is the relationship between financial devel-
opment and growth: is there a causal relationship from the former to the latter? In
Chapter 25, Thorsten Beck evaluates how this key question has been approached
from an econometric perspective. Do financial institutions facilitate economic
growth, for example by reducing information asymmetries and transaction costs?
Amongst other functions, as Beck notes, financial institutions provide payment
services, pool and allocate savings, evaluate information, exercise corporate gov-
ernance and diversify risk. It would seem,a priori, that the provision of such
services must surely move out the aggregate output frontier. However, just finding
positive correlations between indicators of financial development, such as mon-
etization measures, the development of banking institutions and stock markets,
and economic growth is insufficient evidence from an econometric viewpoint.
One of the most fundamental problems in econometrics is the problem of iden-
tification: by themselves, the correlations do not provide evidence of a causal
direction. Beck takes the reader through the detail of this problem and how it has
been approached in the finance-growth econometric literature. A classical method
for dealing with endogenous regressors is instrumental variables (IV) and, in this
context, some ingenuity has been shown in suggesting such variables, including
exogenous country characteristics; for example, settler mortality, latitude and eth-
nic fractionalization. Early regression-based studies used cross-section data on a
number of countries; however, more recent datasets now include dynamic panels
and methods include GMM and cointegration. More recent developments have
been able to access data at the firm and household level, and this has led to much
larger samples being used. For example, Beck, Dermirgüç-Kunt and Makisimovic
(2005) use a sample of over 4,000 firms in 54 countries to consider the effect of
sales growth as a firm-level financing obstacle as well as other variables, including a
country-level financial indicator. As Beck notes, the evidence suggests a strong case
for a causal link between financial development and economic growth, but there
is still much to be done both in terms of techniques, such as GMM, and exploiting
advances at the micro-level.
In Volume 1 of theHandbook, we highlighted recent developments in theoretical
econometrics as applied to problems with a spatial dimension; this is an area that
has grown in application and importance, particularly over the last decade, and
it is natural that we should continue to emphasize its developmental importance
by including two chapters in Part IX. These chapters show how spatial economet-
rics can bring into focus the importance of the dimension of space in economic
decisions and the particular econometric problems and solutions that result. In
Chapter 26, Luc Anselin and Nancy Lozano-Gracia consider spatial hedonic mod-
els applied to house prices. Hedonic price models are familiar from microeconomics
and, in particular, from the seminal contributions of Lancaster (1966) and Rosen
(1974). In the context of house prices, there are key characteristics, such as aspects