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Financial development and growth in the short and long run

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  • Fisman, Raymond
  • Love, Inessa

Abstract

The authors analyze the relationship between financial development and inter-industry resource allocation in the short and long run. They 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 the authors 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, they 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. The authors find differential effects of these measures on industry growth and composition in countries with different levels of financial development. They 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 The World Bank in its series Policy Research Working Paper Series with number 3319.

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Date of creation: 01 May 2004
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Handle: RePEc:wbk:wbrwps:3319

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Keywords: Public Health Promotion; Health Monitoring&Evaluation; Banks&Banking Reform; Water and Industry; Payment Systems&Infrastructure; Achieving Shared Growth; Water and Industry; Governance Indicators; Health Monitoring&Evaluation; Banks&Banking Reform;

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  1. Nicola Cetorelli, 2001. "Banking Market Structure, Financial Dependence and Growth: International Evidence from Industry Data," Journal of Finance, American Finance Association, vol. 56(2), pages 617-648, 04.
  2. 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.
  3. Beck, T.H.L. & Demirgüç-Kunt, A. & Levine, R., 2003. "Law, endowments, and finance," Open Access publications from Tilburg University urn:nbn:nl:ui:12-3125510, Tilburg University.
  4. King, Robert G & Levine, Ross, 1993. "Finance and Growth: Schumpeter Might Be Right," The Quarterly Journal of Economics, MIT Press, vol. 108(3), pages 717-37, August.
  5. Harrigan, James, 1996. "Openness to trade in manufactures in the OECD," Journal of International Economics, Elsevier, vol. 40(1-2), pages 23-39, February.
  6. Beck, Thorsten & Levine, Ross, 2002. "Industry growth and capital allocation:*1: does having a market- or bank-based system matter?," Journal of Financial Economics, Elsevier, vol. 64(2), pages 147-180, May.
  7. Raghuram G. Rajan & Luigi Zingales, . "Financial Dependence and Growth," CRSP working papers 344, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
  8. Levine, Ross, 1996. "Financial development and economic growth : views and agenda," Policy Research Working Paper Series 1678, The World Bank.
  9. Claessens, Stijn & Laeven, Luc, 2002. "Financial Development, Property Rights and Growth," CEPR Discussion Papers 3295, C.E.P.R. Discussion Papers.
  10. de la Fuente, Angel & Marin, JoseMaria, 1996. "Innovation, bank monitoring, and endogenous financial development," Journal of Monetary Economics, Elsevier, vol. 38(2), pages 269-301, October.
  11. Raymond Fisman & Inessa Love, 2003. "Trade Credit, Financial Intermediary Development, and Industry Growth," Journal of Finance, American Finance Association, vol. 58(1), pages 353-374, 02.
  12. Dornbusch, Rudiger & Fischer, Stanley & Samuelson, Paul A, 1977. "Comparative Advantage, Trade, and Payments in a Ricardian Model with a Continuum of Goods," American Economic Review, American Economic Association, vol. 67(5), pages 823-39, December.
  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.
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