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Financial Dependence and Growth

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  • Raghuram G. Rajan
  • Luigi Zingales

Abstract

Does finance affect economic growth? A number of studies have identified a positive correlation between the level of development of a country's financial sector and the rate of growth of its per capita income. As has been noted elsewhere, the observed correlation does not necessarily imply a causal relationship. This paper examines whether financial development facilitates economic growth by scrutinizing one rationale for such a relationship; that financial development reduces the costs of external finance to firms. Specifically, we ask whether industrial sectors that are relatively more in need of external finance develop disproportionately faster in countries with more developed financial markets. We find this to be true in a large sample of countries over the 1980s. We show this result is unlikely to be driven by omitted variables, outliers, or reverse causality.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 5758.

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Date of creation: Sep 1996
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Publication status: published as American Economic Review, Vol. 88, no. 3 (1998): 559-586.
Handle: RePEc:nbr:nberwo:5758

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  1. La nuova rivoluzione liberaloide
    by Francesco Sylos Labini in ROARS - Return on Academic Research on 2012-10-04 16:04:59
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