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How financial markets affect long run growth : a cross country study

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  • Ghani, Ejaz

Abstract

Empirical studies on new growth theory have tended to ignore financial policy's role in development. The author provides evidence that the initial level of financial development is positively associated with a country's later GDP growth rate, after controlling for the effect of the starting value of human capital and the investment rate. A country that starts with a more developed financial system tends to grow faster because it can make more efficient use of resources. It can do so through several channels, including better evaluation and monitoring of firms, lower transaction costs for financial intermediation, and externalities generated from information collected and processed in financial markets. Policy reform that fosters financial development also has a significant positive effect on the growth rate of real GDP. The empirical evidence presented for 50 developing countries tends to reinforce a classical theme of development economics: the importance of human capital and financial markets.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 843.

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Date of creation: 31 Jan 1992
Date of revision:
Handle: RePEc:wbk:wbrwps:843

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Related research

Keywords: Inequality; Economic Theory&Research; Macroeconomic Management; Achieving Shared Growth; Financial Economics;

References

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  1. Townsend, Robert M, 1983. "Financial Structure and Economic Activity," American Economic Review, American Economic Association, American Economic Association, vol. 73(5), pages 895-911, December.
  2. Paul Romer, 1989. "Endogenous Technological Change," NBER Working Papers 3210, National Bureau of Economic Research, Inc.
  3. Easterly, William R. & Wetzel, Deborah L., 1989. "Policy determinants of growth : survey of theory and evidence," Policy Research Working Paper Series 343, The World Bank.
  4. Tjalling C. Koopmans, 1963. "On the Concept of Optimal Economic Growth," Cowles Foundation Discussion Papers, Cowles Foundation for Research in Economics, Yale University 163, Cowles Foundation for Research in Economics, Yale University.
  5. Jung, Woo S, 1986. "Financial Development and Economic Growth: International Evidence," Economic Development and Cultural Change, University of Chicago Press, University of Chicago Press, vol. 34(2), pages 333-46, January.
  6. Stephen D. Williamson, 1984. "Costly Monitoring, Financial Intermediation, and Equilibrium Credit Rationing," Working Papers, Queen's University, Department of Economics 583, Queen's University, Department of Economics.
  7. Sebastian Edwards, 1991. "Trade Orientation, Distortions and Growth in Developing Countries," NBER Working Papers 3716, National Bureau of Economic Research, Inc.
  8. Stern, Nicholas, 1991. "Public policy and the economics of development," European Economic Review, Elsevier, Elsevier, vol. 35(2-3), pages 241-271, April.
  9. Baumol, William J, 1986. "Productivity Growth, Convergence, and Welfare: What the Long-run Data Show," American Economic Review, American Economic Association, American Economic Association, vol. 76(5), pages 1072-85, December.
  10. Stewart, Frances & Ghani, Ejaz, 1991. "How significant are externalities for development?," World Development, Elsevier, Elsevier, vol. 19(6), pages 569-594, June.
  11. Joseph E. Stiglitz, 1991. "Government, Financial Markets, and Economic Development," NBER Working Papers 3669, National Bureau of Economic Research, Inc.
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Citations

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Cited by:
  1. Glenn D. Westley & Sherrill Shaffer, 1997. "Credit Union Policies and Performances in Latin America," IDB Publications 6430, Inter-American Development Bank.
  2. Stolbov, Mikhail, 2012. "The finance-growth nexus revisited: From origins to a modern theoretical landscape," Economics Discussion Papers, Kiel Institute for the World Economy 2012-45, Kiel Institute for the World Economy.
  3. Levine, Ross & Zervos, Sara, 1996. "Stock Market Development and Long-Run Growth," World Bank Economic Review, World Bank Group, World Bank Group, vol. 10(2), pages 323-39, May.
  4. Glenn Westley & Sherrill Shaffer, 1997. "Políticas de las asociaciones de crédito y el desempeño en América Latina," Research Department Publications, Inter-American Development Bank, Research Department 4087, Inter-American Development Bank, Research Department.
  5. TRABELSI, Mohammed, 2002. "Finance and Growth : Empirical Evidence from Developing Countries, 1960-1990," Cahiers de recherche, Universite de Montreal, Departement de sciences economiques 2002-13, Universite de Montreal, Departement de sciences economiques.
  6. Ben Jelili, Riadh & Abdmoulah, Walid, 2013. "Access to Finance Thresholds and the Finance-Growth Nexus," MPRA Paper 52221, University Library of Munich, Germany, revised 2012.
  7. Byamugisha, Frank F.K., 1999. "How land registration affects financial development and economic growth in Thailand," Policy Research Working Paper Series 2241, The World Bank.
  8. Clarke, George R. G., 1995. "More evidence on income distribution and growth," Journal of Development Economics, Elsevier, Elsevier, vol. 47(2), pages 403-427, August.
  9. Valpy FitzGerald (QEH), . "Finance and Growth in Developing Countries: Sound Principles and Unreliable Evidence," QEH Working Papers, Queen Elizabeth House, University of Oxford qehwps153, Queen Elizabeth House, University of Oxford.

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