Financial Development and Growth in the Short and Long Run
AbstractWe analyze the relationship between financial development and inter-industry resource allocation in the short- and long-run. We suggest that in the long-run, economies with high rates of financial development will devote relatively more resources to industries with a 'natural' reliance on outside finance due to a comparative advantage in these industries. By contrast, in the short-run we argue that financial development facilitates the reallocation of resources to industries with good growth opportunities, regardless of their reliance on outside finance. To test these predictions, we use a measure of industry-level 'technological' financial dependence based on the earlier work of Rajan and Zingales (1998), and develop new proxies for shocks to (short run) industry growth opportunities. We find differential effects of these measures on industry growth and composition in countries with different levels of financial development. We obtain results that are consistent with financially developed economies specializing in 'financially dependent' industries in the long-run, and allocating resources to industries with high growth opportunities in the short-run.
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Bibliographic InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 10236.
Date of creation: Jan 2004
Date of revision:
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Other versions of this item:
- Fisman, Raymond & Love, Inessa, 2004. "Financial development and growth in the short and long run," Policy Research Working Paper Series 3319, The World Bank.
- G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
- O15 - Economic Development, Technological Change, and Growth - - Economic Development - - - Economic Development: Human Resources; Human Development; Income Distribution; Migration
This paper has been announced in the following NEP Reports:
- NEP-ALL-2004-01-25 (All new papers)
- NEP-CFN-2004-01-25 (Corporate Finance)
- NEP-DEV-2004-01-25 (Development)
- NEP-FIN-2004-01-25 (Finance)
- NEP-MAC-2004-01-25 (Macroeconomics)
- NEP-MFD-2004-01-25 (Microfinance)
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