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Growth and Finance

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  • John Driffill

    (Birkbeck College, University of London)

Abstract

I review selectively some of the trends in research on the relationships between financial markets and economic growth. Economic theory provides many arguments as to why, given the widespread existence of moral hazard and adverse selection problems in financial transactions, more highly developed financial markets might facilitate faster economic growth. However, it is less clear that summary measures of financial development and structure, widely used in empirical research, are adequate. I review some recent empirical work in this area, and show that apparent effects of financial development on growth may be capturing regional differences, and other factors. There appears to be little empirical support for an effect of financial structure on growth. Much empirical work in this field uses data over short periods of time, of a few decades in length. Looking over longer periods, non-financial forces of increasing returns in production, increasing returns to agglomeration and falling transport costs appear more important, and the potential role of financial markets rather less. The question of whether finance plays a causal role or merely follows economic development remains an open one. Copyright Blackwell Publishing Ltd and The Victoria University of Manchester, 2003.

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Bibliographic Info

Article provided by University of Manchester in its journal The Manchester School.

Volume (Year): 71 (2003)
Issue (Month): 4 (07)
Pages: 363-380

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Handle: RePEc:bla:manchs:v:71:y:2003:i:4:p:363-380

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References

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  1. Ross Levine, 1997. "Financial Development and Economic Growth: Views and Agenda," Journal of Economic Literature, American Economic Association, vol. 35(2), pages 688-726, June.
  2. Bruce Greenwald & Joseph E. Stiglitz, 1993. "New and Old Keynesians," Journal of Economic Perspectives, American Economic Association, vol. 7(1), pages 23-44, Winter.
  3. King, Robert G. & Levine, Ross, 1993. "Finance and growth : Schumpeter might be right," Policy Research Working Paper Series 1083, The World Bank.
  4. Bencivenga, V.R. & Smith, B.D., 1988. "Financial Intermediation And Endogenous Growth," RCER Working Papers 124, University of Rochester - Center for Economic Research (RCER).
  5. Hicks, J. R., 1969. "A Theory of Economic History," OUP Catalogue, Oxford University Press, number 9780198811633.
  6. Lucas, Robert Jr., 1988. "On the mechanics of economic development," Journal of Monetary Economics, Elsevier, vol. 22(1), pages 3-42, July.
  7. Edward Glaeser & Simon Johnson & Andrei Shleifer, 2001. "Coase Versus The Coasians," The Quarterly Journal of Economics, MIT Press, vol. 116(3), pages 853-899, August.
  8. Bencivenga, Valerie R. & Smith, Bruce D., 1993. "Some consequences of credit rationing in an endogenous growth model," Journal of Economic Dynamics and Control, Elsevier, vol. 17(1-2), pages 97-122.
  9. Piketty, Thomas, 1997. "The Dynamics of the Wealth Distribution and the Interest Rate with Credit Rationing," Review of Economic Studies, Wiley Blackwell, vol. 64(2), pages 173-89, April.
  10. Oded Galor & Joseph Zeira, 2013. "Income Distribution and Macroeconomics," Working Papers 2013-12, Brown University, Department of Economics.
  11. De Gregorio, Jose, 1996. "Borrowing constraints, human capital accumulation, and growth," Journal of Monetary Economics, Elsevier, vol. 37(1), pages 49-71, February.
  12. King, Robert G. & Levine, Ross, 1993. "Finance and growth : Schumpeter might be right," Policy Research Working Paper Series 1083, The World Bank.
  13. Ann L. Owen & David N. Weil, 1997. "Intergenerational Earnings Mobility, Inequality, and Growth," NBER Working Papers 6070, National Bureau of Economic Research, Inc.
  14. Bernanke, Ben & Gertler, Mark, 1989. "Agency Costs, Net Worth, and Business Fluctuations," American Economic Review, American Economic Association, vol. 79(1), pages 14-31, March.
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Citations

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Cited by:
  1. Colin Kirkpatrick, 2005. "Finance and Development: Overview and Introduction," Journal of Development Studies, Taylor & Francis Journals, vol. 41(4), pages 631-635.
  2. Alex Trew, 2006. "Finance and Growth: A Critical Survey," The Economic Record, The Economic Society of Australia, vol. 82(259), pages 481-490, December.
  3. Max Gillman & Michal Kejak, 2007. " Inflation, Financial Development and Human Capital-Based Endogenous Growth: an Explanation of Ten Empirical Findings," CDMA Conference Paper Series 0703, Centre for Dynamic Macroeconomic Analysis.
  4. James B. Ang, 2008. "A Survey Of Recent Developments In The Literature Of Finance And Growth," Journal of Economic Surveys, Wiley Blackwell, vol. 22(3), pages 536-576, 07.
  5. Franz R. Hahn, 2005. "Finance-Growth Nexus and the P-bias: Evidence from OECD Countries," Economic Notes, Banca Monte dei Paschi di Siena SpA, vol. 34(1), pages 113-126, 02.
  6. Dimitrios Varvarigos & Keith Blackburn, 2005. "Growth, Uncertainty and Finance," Money Macro and Finance (MMF) Research Group Conference 2005 12, Money Macro and Finance Research Group.
  7. Trew, Alex, 2008. "Efficiency, depth and growth: Quantitative implications of finance and growth theory," Journal of Macroeconomics, Elsevier, vol. 30(4), pages 1550-1568, December.
  8. K Blackburn & D Varvarigos, 2005. "Growth, Uncertainty and Finance," Centre for Growth and Business Cycle Research Discussion Paper Series 48, Economics, The Univeristy of Manchester.
  9. Mark A Roberts, . "The conflating effects of education and financial competition in an OLG growth model with Nelson-Phelps human capital," Discussion Papers 12/07, University of Nottingham, Centre for Finance, Credit and Macroeconomics (CFCM).

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