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Stock markets, growth, and policy

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Author Info
Levine, Ross

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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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Publisher 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 listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Romer, Paul M, 1986. "Increasing Returns and Long-run Growth," Journal of Political Economy, University of Chicago Press, vol. 94(5), pages 1002-37, October. [Downloadable!] (restricted)
  2. Robert Townsend, 1979. "Optimal contracts and competitive markets with costly state verification," Staff Report 45, Federal Reserve Bank of Minneapolis. [Downloadable!]
    Other versions:
  3. Joseph G. Haubrich & Robert G. King, 1984. "Banking and Insurance," NBER Working Papers 1312, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  4. Edward C. Prescott & John H. Boyd, 1986. "Dynamic coalitions, growth, and the firm," Staff Report 100, Federal Reserve Bank of Minneapolis. [Downloadable!]
  5. 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. [Downloadable!] (restricted)
  6. 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. [Downloadable!] (restricted)
  7. Diamond, Douglas W, 1984. "Financial Intermediation and Delegated Monitoring," Review of Economic Studies, Blackwell Publishing, vol. 51(3), pages 393-414, July. [Downloadable!] (restricted)
  8. 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. [Downloadable!] (restricted)
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  9. Jeremy Greenwood & Boyan Jovanovic, 1989. "Financial Development, Growth, and the Distribution of Income," NBER Working Papers 3189, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  10. Robert G. King & Sergio Rebelo, 1990. "Public Policy and Economic Growth: Developing Neoclassical Implications," NBER Working Papers 3338, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  11. 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. [Downloadable!] (restricted)
  12. Barro, R.J., 1989. "Economic Growth In A Cross Section Of Countries," RCER Working Papers 201, University of Rochester - Center for Economic Research (RCER).
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  13. Bencivenga, V.R. & Smith, B.D., 1988. "Financial Intermediation And Endogenous Growth," RCER Working Papers 124, University of Rochester - Center for Economic Research (RCER).
    Other versions:
  14. Ross Levine, 1990. "Financial structure and economic development," International Finance Discussion Papers 381, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
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  15. Romer, Paul M, 1990. "Endogenous Technological Change," Journal of Political Economy, University of Chicago Press, vol. 98(5), pages S71-102, October. [Downloadable!] (restricted)
    Other versions:
  16. Lucas, Robert Jr., 1988. "On the mechanics of economic development," Journal of Monetary Economics, Elsevier, vol. 22(1), pages 3-42, July. [Downloadable!] (restricted)
Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. 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. [Downloadable!] (restricted)
    Other versions:
  2. Nouriel Roubini & Xavier Sala-i-Martin, 1992. "A Growth Model of Inflation, Tax Evasion, and Financial Repression," NBER Working Papers 4062, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  3. Renelt, David, 1991. "Economic growth : a review of the theoretical and empirical literature," Policy Research Working Paper Series 678, The World Bank. [Downloadable!]
  4. Atish R. Ghosh & Holger Wolf, 1998. "Thresholds and Context Dependence in Growth," NBER Working Papers 6480, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  5. Corbo, Vittorio & Fischer, Stanley, 1991. "Adjustment programs and Bank support : rationale and main results," Policy Research Working Paper Series 582, The World Bank. [Downloadable!]
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