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The co-evolution of the real and financial sectors in the growth process

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John H. Boyd
Bruce D. Smith

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Abstract

We produce a theoretical framework that helps explain the co-evolution of the real and financial sectors of an economy in the growth process, as described by Gurley and Shaw. According to them, self-financed capital investment first gives way to debt finance and later to the emergence of equity as an additional instrument for raising funds externally. As the economy develops further, the aggregate ratio of debt to equity will generally fall. We analyze that portion of their account concerning the evolution of equity markets. We show that in an important sense, debt and equity are complementary sources for the financing of capital investments.

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Paper provided by Federal Reserve Bank of Minneapolis in its series Working Papers with number 541.

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Date of creation: 1996
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Publication status: Published in World Bank Economic Review (Vol. 10, No. 2, May 1996, pp. 371-396)
Handle: RePEc:fip:fedmwp:541

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Keywords: Equity ; Debt;

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  1. Demirguc-Kunt, Asli & Huizinga, Harry, 1998. "Determinants of commercial bank interest margins and profitability : some international evidence," Policy Research Working Paper Series 1900, The World Bank. [Downloadable!]
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  2. Keith Blackburn & Niloy Bose & Salvatore Capasso, 2003. "Financial Development, Financing Choice and Economic Growth," CSEF Working Papers 96, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy. [Downloadable!]
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  3. PN Snowden, 2005. "Capital structure and a difference of opinion: stock markets, minority equity and economic development," Working Papers 002451, Lancaster University Management School, Economics Department. [Downloadable!]
  4. Veronika Dolar & Césaire Meh, 2002. "Financial Structure and Economic Growth: A Non-Technical Survey," Working Papers 02-24, Bank of Canada. [Downloadable!]
  5. Davide Iacoboni & Alberto Zazzaro, 2000. "Legal system efficiency, information production, and technological choice: a banking model," Heterogeneity and monetary policy 0005, Universita di Modena e Reggio Emilia, Dipartimento di Economia Politica. [Downloadable!]
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  6. Fohlin, Caroline., 2000. "Economic, Political, and Legal Factors in Financial System Development: International Patterns in Historical Perspective"," Working Papers 1089, California Institute of Technology, Division of the Humanities and Social Sciences. [Downloadable!]
  7. Ross Levine, 1997. "Napoleón, bolsas y crecimiento en América Latina," RES Working Papers 4107, Inter-American Development Bank, Research Department. [Downloadable!]
  8. Capasso, Salvatore, 2006. "Stock Market Development and Economic Growth," Working Papers RP2006/102, World Institute for Development Economic Research (UNU-WIDER). [Downloadable!]
  9. Koetter, Michael & Wedow, Michael, 2005. "Finance and growth in a bank-based economy: is it quantity or quality that matters?," Discussion Paper Series 2: Banking and Financial Studies 2006,02, Deutsche Bundesbank, Research Centre. [Downloadable!]
  10. Ross Levine, 1997. "Napoleon, Bourses, and Growth in Latin America," RES Working Papers 4106, Inter-American Development Bank, Research Department. [Downloadable!]
  11. Catalan, Mario & Impavido, Gregorio & Musalem, Alberto R., 2000. "Contractual savings or stock market development - Which leads?," Policy Research Working Paper Series 2421, The World Bank. [Downloadable!]
  12. Geert Bekaert & Campbell R. Harvey, 1998. "Capital Flows and the Behavior of Emerging Market Equity Returns," NBER Working Papers 6669, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  13. Andreas Billmeier & Isabella Massa, 2007. "What Drives Stock Market Development in the Middle East and Central Asia--Institutions, Remittances, or Natural Resources?," IMF Working Papers 07/157, International Monetary Fund. [Downloadable!]
  14. Hiroko Oura, 2008. "Financial Development and Growth in India: A Growing Tiger in a Cage?," IMF Working Papers 08/79, International Monetary Fund. [Downloadable!]
  15. Valeriano F. García & Lin Liu, 1999. "Macroeconomic Determinants of Stock Market Development," Journal of Applied Economics, Universidad del CEMA, vol. 0, pages 29-59, May. [Downloadable!]
  16. Andrea Schertler, 2002. "Path Dependencies in Venture Capital Markets," Kiel Working Papers 1120, Kiel Institute for the World Economy. [Downloadable!]
  17. Levine, Ross & Zervos, Sara, 1996. "Stock markets, banks, and economic growth," Policy Research Working Paper Series 1690, The World Bank. [Downloadable!]
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