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Does Economic Diversification Lead to Financial Development? Evidence From topography

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  • Rodney Ramcharan

Abstract

An influential theoretical literature has observed that economic diversification can reduce risk and increase financial development. But causality operates in both directions, as a well functioning financial system can enable a society to invest in more productive but risky projects, thereby determining the degree of economic diversification. Thus, ordinary least squares (OLS) estimates of the impact of economic diversification on financial development are likely to be biased. Motivated by the economic geography literature, this paper uses instruments derived from topographical characteristics to estimate the impact of economic diversification on the development of finance. The fourth estimates suggest a large and robust role for diversification in shaping financial development. And these results imply that, by impeding financial sector development, the concentration of economic activity common in developing countries can adversely affect financial and economic development.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 06/35.

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Length: 45
Date of creation: 01 Jan 2006
Date of revision:
Handle: RePEc:imf:imfwpa:06/35

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Related research

Keywords: Financial sector; Financial systems; Economic growth; land area; statistic; heteroscedasticity; standard deviation; correlation; topography; standard errors; statistics; economic geography; instrumental variables; samples; grasslands; international earth science information network; earth science; savannas; geographic variables; correlations; predictions; plateaus; probability; empirical framework; land elevation; sampling error; earthwork; logarithm; soil characteristics; cross-country variation; calibration; geographic distribution; covariance; econometrics; sampling; equation; spatial distribution; geographical variables; sensitivity analyses; functional form; sample size; measurement error; deforestation; survey; desertification;

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Cited by:
  1. Jaimovich, Esteban, 2011. "Sectoral differentiation, allocation of talent, and financial development," Journal of Development Economics, Elsevier, vol. 96(1), pages 47-60, September.
  2. Nathan Nunn & Diego Puga, 2009. "Ruggedness: The Blessing of Bad Geography in Africa," NBER Working Papers 14918, National Bureau of Economic Research, Inc.
  3. Naude, Wim & Rossouw, Riaan, 2008. "Export Diversification and Specialization in South Africa: Extent and Impact," Working Paper Series RP2008/93, World Institute for Development Economic Research (UNU-WIDER).
  4. KAMGNA, Severin Yves, 2007. "Diversification économique en Afrique centrale : Etats des lieux et enseignements
    [Economic diversification in central Africa]
    ," MPRA Paper 9602, University Library of Munich, Germany.
  5. Claessens, Stijn & Perotti, Enrico, 2007. "Finance and inequality: Channels and evidence," Journal of Comparative Economics, Elsevier, vol. 35(4), pages 748-773, December.

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