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Short-Run Costs of Financial Market Development in Industrialized Economies

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  • Thomas Lindh

    (Uppsala University, Institute for Futures Study)

Abstract

Large increases in the financial sector share of GDP in industrialized countries fail to be reflected in higher short-run growth, although a positive long-run relation between financial development and growth is well documented. To reconcile these facts a model of financial development is derived, where short-run growth effects are negative. The crucial mechanism is a trade-off between financial and technological diversification. Fixed financial market costs imply that financial market extensions cause a slump in growth rates, recovering as specialization increases, while saving rates probably decrease also in the long run. Empirical patterns in recent research are consistent with these predictions.

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File URL: http://college.holycross.edu/RePEc/eej/Archive/Volume26/V26N2P221_239.pdf
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Bibliographic Info

Article provided by Eastern Economic Association in its journal Eastern Economic Journal.

Volume (Year): 26 (2000)
Issue (Month): 2 (Spring)
Pages: 221-239

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Handle: RePEc:eej:eeconj:v:26:y:2000:i:2:p:221-239

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Keywords: Economics;

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References

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  1. Aubhik Khan, 1999. "Financial development and economic growth," Working Papers 99-11, Federal Reserve Bank of Philadelphia.
  2. Atje, Raymond & Jovanovic, Boyan, 1993. "Stock markets and development," European Economic Review, Elsevier, vol. 37(2-3), pages 632-640, April.
  3. Panicos O. Demetriades & Khaled A.Hussein, 1995. "Does Financial Development Cause Economic Growth? Time-Series Evidence from 16 Countries," Keele Department of Economics Discussion Papers (1995-2001) 95/13, Department of Economics, Keele University.
  4. Sussman, Oren & Zeira, Joseph, 1995. "Banking and Development," CEPR Discussion Papers 1127, C.E.P.R. Discussion Papers.
  5. Kandel, Shmuel & Stambaugh, Robert F., 1991. "Asset returns and intertemporal preferences," Journal of Monetary Economics, Elsevier, vol. 27(1), pages 39-71, February.
  6. Robert E. Hall, 1988. "Intertemporal Substitution in Consumption," NBER Working Papers 0720, National Bureau of Economic Research, Inc.
  7. Greenwood, Jeremy & Jovanovic, Boyan, 1990. "Financial Development, Growth, and the Distribution of Income," Journal of Political Economy, University of Chicago Press, vol. 98(5), pages 1076-1107, October.
  8. Levine, Ross, 1996. "Financial development and economic growth : views and agenda," Policy Research Working Paper Series 1678, The World Bank.
  9. Paul Harrison & Oren Sussman & Joseph Zeira, 1999. "Finance and growth: theory and new evidence," Finance and Economics Discussion Series 1999-35, Board of Governors of the Federal Reserve System (U.S.).
  10. Bencivenga, Valerie R & Smith, Bruce D, 1991. "Financial Intermediation and Endogenous Growth," Review of Economic Studies, Wiley Blackwell, vol. 58(2), pages 195-209, April.
  11. Sergio Rebelo, 1999. "Long Run Policy Analysis and Long Run Growth," Levine's Working Paper Archive 2114, David K. Levine.
  12. Pagano, Marco, 1993. "Financial markets and growth: An overview," European Economic Review, Elsevier, vol. 37(2-3), pages 613-622, April.
  13. Klaus Neusser & Maurice Kugler, 1998. "Manufacturing Growth And Financial Development: Evidence From Oecd Countries," The Review of Economics and Statistics, MIT Press, vol. 80(4), pages 638-646, November.
  14. Jacobson, Tor & Lindh, Thomas & Warne, Anders, 1998. "Growth, Savings, Financial Markets and Markov Switching Regimes," Working Paper Series 69, Sveriges Riksbank (Central Bank of Sweden).
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Cited by:
  1. Felix Rioja & Neven Valev, 2004. "Finance and the Sources of Growth at Various Stages of Economic Development," Economic Inquiry, Western Economic Association International, vol. 42(1), pages 127-140, January.

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