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Financial development : structure and dynamics

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  • de la Torre, Augusto
  • Feyen, Erik
  • Ize, Alain

Abstract

This paper analyzes the bright and dark sides of the financial development process through the lenses of the four fundamental frictions to which agents are exposed -- information asymmetry, enforcement, collective action, and collective cognition. Financial development is shaped by the efforts of market participants to grind down or circumvent these frictions, a process further spurred by financial innovation and scale and network effects. The analysis leads to broad predictions regarding the sequencing and convexity of the dynamic paths for a battery of financial development indicators. The method used also yields a robust way to benchmark the financial development paths followed by individual countries or regions. The paper explores the reasons for path deviations and gaps relative to the benchmark. Demand-related effects (past output growth), financial crashes, and supply-related effects (the quality of the enabling environment) all play an important role. Informational frictions are easier to overcome than contractual frictions, not least because of the transferability of financial innovation across borders.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 5854.

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Date of creation: 01 Oct 2011
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Handle: RePEc:wbk:wbrwps:5854

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Related research

Keywords: Debt Markets; Economic Theory&Research; Emerging Markets; Access to Finance; Banks&Banking Reform;

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References

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  1. La Porta, Rafael & Lopez-de-Silanes, Florencio & Shleifer, Andrei & Vishny, Robert W., 1998. "Law and Finance," Scholarly Articles 3451310, Harvard University Department of Economics.
  2. Bengt Holmstrom & Jean Tirole, 1998. "Private and Public Supply of Liquidity," Journal of Political Economy, University of Chicago Press, vol. 106(1), pages 1-40, February.
  3. Nicola Gennaioli & Andrei Shleifer & Robert Vishny, 2010. "Neglected Risks, Financial Innovation, and Financial Fragility," Working Papers 502, Barcelona Graduate School of Economics.
  4. Robert C. Merton & Zvi Bodie, 2004. "The Design of Financial Systems: Towards a Synthesis of Function and Structure," NBER Working Papers 10620, National Bureau of Economic Research, Inc.
  5. Maurer, Noel & Haber, Stephen, 2007. "Related Lending and Economic Performance: Evidence from Mexico," The Journal of Economic History, Cambridge University Press, vol. 67(03), pages 551-581, September.
  6. Rocco Huang & Lev Ratnovski, 2009. "The dark side of bank wholesale funding," Working Papers 09-3, Federal Reserve Bank of Philadelphia.
  7. Enrico Berkes & Ugo Panizza & Jean-Louis Arcand, 2012. "Too Much Finance?," IMF Working Papers 12/161, International Monetary Fund.
  8. de la Torre, Augusto & Ize, Alain, 2009. "Regulatory reform : integrating paradigms," Policy Research Working Paper Series 4842, The World Bank.
  9. Barry Eichengreen & Ricardo Hausmann & Ugo Panizza, 2007. "Currency Mismatches, Debt Intolerance, and the Original Sin: Why They Are Not the Same and Why It Matters," NBER Chapters, in: Capital Controls and Capital Flows in Emerging Economies: Policies, Practices and Consequences, pages 121-170 National Bureau of Economic Research, Inc.
  10. Caprio, Gerard & Honohan, Patrick, 2001. "Finance for Growth: Policy Choices in a Volatile World," MPRA Paper 9929, University Library of Munich, Germany.
  11. de la Torre, Augusto & Ize, Alain, 2011. "Containing systemic risk : paradigm-based perspectives on regulatory reform," Policy Research Working Paper Series 5523, The World Bank.
  12. Josh Lerner & Peter Tufano, 2011. "The Consequences of Financial Innovation: A Counterfactual Research Agenda," NBER Working Papers 16780, National Bureau of Economic Research, Inc.
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Cited by:
  1. Cihak, Martin & Demirguc-Kunt, Asli & Feyen, Erik & Levine, Ross, 2012. "Benchmarking financial systems around the world," Policy Research Working Paper Series 6175, The World Bank.

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