Contesting and Reassessing the 'Too Much Finance' Hypothesis: A Literature Review

Abstract

This paper reviews recent contributions that reassess and contest the “too much finance” hypothesis. It surveys a predominantly empirical body of work that, in contrast to earlier studies focused mainly on advanced economies, increasingly incorporates developing and less-developed regions. The evidence reviewed suggests that an inverted-U-shaped relationship between financial development and economic growth is more consistently identified in studies of advanced economies. In contrast, analyses of samples of less-developed countries more frequently report positive linear or U-shaped relationships, pointing to conditions of “too little finance.” The review also documents methodological shifts in the literature, including a growing adoption of nonlinear modeling strategies, the use of alternative measures of financial development, and a greater focus on mediating factors in the finance-growth nexus. The paper concludes that a clear consensus remains elusive. The literature faces persistent methodological challenges, sensitivity to model specification and sample composition, and a prevailing emphasis on empirical estimation rather than theoretical discussion.