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Stock markets, growth, and policy

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  • Levine, Ross

Abstract

This paper shows how stock markets can accelerate growth and how policy can affect that growth either directly (by altering investment incentives) or indirectly (by changing the incentives underlying the creation of financial contracts). To help explain the role of financial markets in economic development, an endogenous growth model in which a stock market emerges to allocate risk was constructed. The model explores how the stock market alters investment incentives in ways that change steady-state growth rates. This paper demonstrates that stock markets can accelerate growth by: (a) facilitating the ability to trade ownership of firms without disrupting the productive processes occurring within firms; and (b) allowing agents to diversify portfolios across firms.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 484.

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Date of creation: 31 Aug 1990
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Handle: RePEc:wbk:wbrwps:484

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Related research

Keywords: Economic Theory&Research; Environmental Economics&Policies; Banks&Banking Reform; Financial Intermediation; Economic Growth;

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References

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  1. Greenwood, J. & Jovanovic, B., 1988. "Financial Development, Growth, And The Distribution Of Income," RCER Working Papers 131, University of Rochester - Center for Economic Research (RCER).
  2. Diamond, Douglas W, 1984. "Financial Intermediation and Delegated Monitoring," Review of Economic Studies, Wiley Blackwell, vol. 51(3), pages 393-414, July.
  3. Barro, R.J., 1989. "Economic Growth In A Cross Section Of Countries," RCER Working Papers 201, University of Rochester - Center for Economic Research (RCER).
  4. Maddison, Angus, 1987. "Growth and Slowdown in Advanced Capitalist Economies: Techniques of Quantitative Assessment," Journal of Economic Literature, American Economic Association, vol. 25(2), pages 649-98, June.
  5. Robert Townsend, 1979. "Optimal contracts and competitive markets with costly state verification," Staff Report 45, Federal Reserve Bank of Minneapolis.
  6. Paul M Romer, 1999. "Increasing Returns and Long-Run Growth," Levine's Working Paper Archive 2232, David K. Levine.
  7. Bencivenga, V.R. & Smith, B.D., 1988. "Financial Intermediation And Endogenous Growth," RCER Working Papers 124, University of Rochester - Center for Economic Research (RCER).
  8. Bruce C. Greenwald & Joseph E. Stiglitz, 1991. "Financial Market Imperfections and Productivity Growth," NBER Working Papers 2945, National Bureau of Economic Research, Inc.
  9. Ross Levine, 1990. "Financial structure and economic development," International Finance Discussion Papers 381, Board of Governors of the Federal Reserve System (U.S.).
  10. Joseph G. Haubrich & Robert G. King, 1984. "Banking and Insurance," NBER Working Papers 1312, National Bureau of Economic Research, Inc.
  11. Barro, Robert J, 1990. "Government Spending in a Simple Model of Endogenous Growth," Journal of Political Economy, University of Chicago Press, vol. 98(5), pages S103-26, October.
  12. Romer, Paul M, 1990. "Endogenous Technological Change," Journal of Political Economy, University of Chicago Press, vol. 98(5), pages S71-102, October.
  13. King, Robert G & Rebelo, Sergio, 1990. "Public Policy and Economic Growth: Developing Neoclassical Implications," Journal of Political Economy, University of Chicago Press, vol. 98(5), pages S126-50, October.
  14. Lucas, Robert Jr., 1988. "On the mechanics of economic development," Journal of Monetary Economics, Elsevier, vol. 22(1), pages 3-42, July.
  15. Abramovitz, Moses, 1986. "Catching Up, Forging Ahead, and Falling Behind," The Journal of Economic History, Cambridge University Press, vol. 46(02), pages 385-406, June.
  16. Summers, Robert & Kravis, Irving B. & Heston, Alan, 1984. "Changes in the world income distribution," Journal of Policy Modeling, Elsevier, vol. 6(2), pages 237-269, May.
  17. Edward C. Prescott & John H. Boyd, 1986. "Dynamic coalitions, growth, and the firm," Staff Report 100, Federal Reserve Bank of Minneapolis.
  18. Baumol, William J, 1986. "Productivity Growth, Convergence, and Welfare: What the Long-run Data Show," American Economic Review, American Economic Association, vol. 76(5), pages 1072-85, December.
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Citations

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Cited by:
  1. Roubini, N. & Sala-i-Martin, X., 1992. "A Growth Model of Inflation, Tax Evasion and Financial Repression," Papers 658, Yale - Economic Growth Center.
  2. Corbo, Vittorio & Fischer, Stanley, 1991. "Adjustment programs and Bank support : rationale and main results," Policy Research Working Paper Series 582, The World Bank.
  3. Renelt, David, 1991. "Economic growth : a review of the theoretical and empirical literature," Policy Research Working Paper Series 678, The World Bank.
  4. William Easterly & Michael Kremer & Lant Pritchett & Lawrence H. Summers, 1993. "Good Policy or Good Luck? Country Growth Performance and Temporary Shocks," NBER Working Papers 4474, National Bureau of Economic Research, Inc.
  5. Atish R. Ghosh & Holger Wolf, 1998. "Thresholds and Context Dependence in Growth," NBER Working Papers 6480, National Bureau of Economic Research, Inc.

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