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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, vol. 73(5), pages 895-911, December.
  2. Stern, Nicholas, 1991. "Public policy and the economics of development," European Economic Review, Elsevier, vol. 35(2-3), pages 241-271, April.
  3. Paul M Romer, 1999. "Endogenous Technological Change," Levine's Working Paper Archive 2135, David K. Levine.
  4. 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.
  5. Stephen D. Williamson, 1984. "Costly Monitoring, Financial Intermediation, and Equilibrium Credit Rationing," Working Papers 583, Queen's University, Department of Economics.
  6. Edwards, Sebastian, 1992. "Trade orientation, distortions and growth in developing countries," Journal of Development Economics, Elsevier, vol. 39(1), pages 31-57, July.
  7. Jung, Woo S, 1986. "Financial Development and Economic Growth: International Evidence," Economic Development and Cultural Change, University of Chicago Press, vol. 34(2), pages 333-46, January.
  8. 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.
  9. Stewart, Frances & Ghani, Ejaz, 1991. "How significant are externalities for development?," World Development, Elsevier, vol. 19(6), pages 569-594, June.
  10. Tjalling C. Koopmans, 1963. "On the Concept of Optimal Economic Growth," Cowles Foundation Discussion Papers 163, Cowles Foundation for Research in Economics, Yale University.
  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. Levine, Ross & Zervos, Sara, 1996. "Stock market development and long-run growth," Policy Research Working Paper Series 1582, The World Bank.
  2. Clarke, George R. G., 1992. "More evidence on income distribution and growth," Policy Research Working Paper Series 1064, The World Bank.
  3. Glenn D. Westley & Sherrill Shaffer, 1998. "Credit union policies and performance in Latin America," Working Papers 98-1, Federal Reserve Bank of Philadelphia.
  4. 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.
  5. Valpy FitzGerald (QEH), . "Finance and Growth in Developing Countries: Sound Principles and Unreliable Evidence," QEH Working Papers qehwps153, Queen Elizabeth House, University of Oxford.
  6. 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.
  7. Stolbov, Mikhail, 2012. "The finance-growth nexus revisited: From origins to a modern theoretical landscape," Economics Discussion Papers 2012-45, Kiel Institute for the World Economy.
  8. 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.
  9. Glenn Westley & Sherrill Shaffer, 1997. "Políticas de las asociaciones de crédito y el desempeño en América Latina," Research Department Publications 4087, Inter-American Development Bank, Research Department.

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