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Financial Development and Growth in the Short and Long Run

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  • Raymond Fisman
  • Inessa Love

Abstract

We 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 Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 10236.

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Date of creation: Jan 2004
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Publication status: published as Fisman, Raymond and Inessa Love. "FINANCIAL DEVELOPMENT AND INTERSECTORAL ALLOCATION: A NEW APPROACH." Journal of Finance, 2005.
Handle: RePEc:nbr:nberwo:10236

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  1. Nicola Cetorelli & Michele Gambera, 1999. "Banking Market Structure, Financial Dependence and Growth: International Evidence from Industry Data," Center for Financial Institutions Working Papers 00-19, Wharton School Center for Financial Institutions, University of Pennsylvania.
  2. Raymond Fisman & Inessa Love, 2002. "Trade Credit, Financial Intermediary Development and Industry Growth," NBER Working Papers 8960, National Bureau of Economic Research, Inc.
  3. Thorsten Beck & Ross Levine, 2002. "Industry Growth and Capital Allocation: Does Having a Market- or Bank-Based System Matter?," NBER Working Papers 8982, National Bureau of Economic Research, Inc.
  4. R. Dornbusch & S. Fischer & P. A. Samuelson, 1976. "Comparative Advantage, Trade and Payments in a Ricardian Model With a Continuum of Goods," Working papers 178, Massachusetts Institute of Technology (MIT), Department of Economics.
  5. repec:fth:wobaco:1083 is not listed on IDEAS
  6. Harrigan, James, 1996. "Openness to trade in manufactures in the OECD," Journal of International Economics, Elsevier, vol. 40(1-2), pages 23-39, February.
  7. Raghuram G. Rajan & Luigi Zingales, 1996. "Financial Dependence and Growth," NBER Working Papers 5758, National Bureau of Economic Research, Inc.
  8. Claessens, Stijn & Laeven, Luc, 2002. "Financial development, property rights, and growth," Policy Research Working Paper Series 2924, The World Bank.
  9. King, Robert G. & Levine, Ross, 1993. "Finance and growth : Schumpeter might be right," Policy Research Working Paper Series 1083, The World Bank.
  10. Beck, Thorsten & Demirguc-Kunt, Asli & Levine, Ross, 2003. "Law, endowments, and finance," Journal of Financial Economics, Elsevier, vol. 70(2), pages 137-181, November.
  11. Levine, Ross, 1996. "Financial development and economic growth : views and agenda," Policy Research Working Paper Series 1678, The World Bank.
  12. de la Fuente, Angel & Marín Vigueras, José Maria, 1995. "Innovation, 'Bank' Monitoring and Endogenous Financial Development," CEPR Discussion Papers 1276, C.E.P.R. Discussion Papers.
  13. Raymond Fisman & Inessa Love, 2004. "Financial Development and Intersectoral Allocation: A New Approach," Journal of Finance, American Finance Association, vol. 59(6), pages 2785-2807, December.
  14. Blackburn, Keith & Hung, Victor T Y, 1998. "A Theory of Growth, Financial Development and Trade," Economica, London School of Economics and Political Science, vol. 65(257), pages 107-24, February.
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