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Financial structures and economic development

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Author Info
Levine, Ross

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Abstract

The author constructs a model that captures the two-way nature of the relationship between financial and economic development - and allows societies at different levels of economic development and with different policies to choose different financial services. In this model, various types of financial contracts and institutions arise in response to the economic environment. Incentives for financial structures to emerge are generated by liquidity and productivity risk, the costs of gathering information and mobilizing resources, and the costs of financial transactions. The emergence and development of financial arrangements in response to the economic environment can alter investment decisions and per capita growth rates - while the level of per capita income helps determine the types of financial services a particular society chooses to develop and use. The author not only reconciles more empirical regularities than past theoretical studies have done, but highlights the role of public policies on financial activities. Policy has important implications for the rate of economic growth, the level of financial development, and the types of institutions providing financial services. The model also predicts that per capita growth rates should be related to the types of financial services provided by the financial sector. Thus, the most common empirical measure of financial development may not appropriately capture fundamental features of financial development.

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Paper provided by The World Bank in its series Policy Research Working Paper Series with number 849.

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Date of creation: 29 Feb 1992
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Handle: RePEc:wbk:wbrwps:849

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Keywords: Economic Theory&Research Environmental Economics&Policies Banks&Banking Reform Financial Intermediation Governance Indicators

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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. Gertler, Mark, 1988. "Financial Structure and Aggregate Economic Activity: An Overview," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 20(3), pages 559-88, August. [Downloadable!] (restricted)
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  2. Megginson, William L & Weiss, Kathleen A, 1991. " Venture Capitalist Certification in Initial Public Offerings," Journal of Finance, American Finance Association, vol. 46(3), pages 879-903, July. [Downloadable!] (restricted)
  3. Greenwood, Jeremy & Jovanovic, Boyan, 1990. "Financial Development, Growth, and the Distribution of Income," Journal of Political Economy, University of Chicago Press, vol. 98(5), pages 1076-1107, October. [Downloadable!] (restricted)
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  4. Diamond, Douglas W, 1984. "Financial Intermediation and Delegated Monitoring," Review of Economic Studies, Blackwell Publishing, vol. 51(3), pages 393-414, July. [Downloadable!] (restricted)
  5. Bencivenga, Valerie R & Smith, Bruce D, 1991. "Financial Intermediation and Endogenous Growth," Review of Economic Studies, Blackwell Publishing, vol. 58(2), pages 195-209, April. [Downloadable!] (restricted)
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  6. Seward, James K, 1990. " Corporate Financial Policy and the Theory of Financial Intermediation," Journal of Finance, American Finance Association, vol. 45(2), pages 351-77, June. [Downloadable!] (restricted)
  7. Sergio T. Rebelo, 1992. "Long Run Policy Analysis and Long Run Growth," NBER Working Papers 3325, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  8. 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. [Downloadable!] (restricted)
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  9. Lucas, Robert Jr., 1988. "On the mechanics of economic development," Journal of Monetary Economics, Elsevier, vol. 22(1), pages 3-42, July. [Downloadable!] (restricted)
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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. Claessens, Stijn & Klingebiel, Daniela & Schmukler, Sergio L., 2002. "Explaining the migration of stocks from exchanges in emerging economies to international centers," Policy Research Working Paper Series 2816, The World Bank. [Downloadable!]
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  2. Stepan Jurajda & Janet Mitchell, 2001. "Markets and Growth," GE, Growth, Math methods 0111001, EconWPA. [Downloadable!]
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  3. Nirvikar Singh & T. Srinivasan, 2004. "Fiscal Policy in India: Lessons and Priorities," Santa Cruz Department of Economics, Working Paper Series 1022, Department of Economics, UC Santa Cruz. [Downloadable!]
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  4. Veronika Dolar & Césaire Meh, 2002. "Financial Structure and Economic Growth: A Non-Technical Survey," Working Papers 02-24, Bank of Canada. [Downloadable!]
  5. Miklós Koren & Silvana Tenreyro, 2004. "Technological diversification," Working Papers 05-1, Federal Reserve Bank of Boston. [Downloadable!]
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  6. Jith Jayaratne & Philip E. Strahan, 1995. "The finance-growth nexus: evidence from bank branch deregulation," Research Paper 9513, Federal Reserve Bank of New York. [Downloadable!]
  7. Amparo Nagore & Joaquín Maudos Villarroya, 2005. "Explaining Market Power Differences In Banking: A Cross-Country Study," Working Papers. Serie EC 2005-10, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie). [Downloadable!]
  8. Guglielmo Maria Caporale, & Peter G. A Howells, & Alaa M. Soliman,, 2003. "Endogenous growth and Stock Market Development," Discussion Papers 0302, University of the West of England, Department of Economics. [Downloadable!]
  9. Panapoulou, Maria, 2002. "Technological and Structural Change in the European Banking Industry," EIFC - Technology and Finance Working Papers 13, United Nations University, Institute for New Technologies. [Downloadable!]
  10. Ross Levine & Sergio L. Schmukler, 2003. "Migration, Spillovers,and Trade Diversion: The Impact of Internationalization on Stock Market Liquidity," NBER Working Papers 9614, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  11. Gérard Charreaux, 2004. "Les théories de la gouvernance:de la gouvernance des entreprises à la gouvernance des systèmes nationaux," Working Papers FARGO 1040101, Université de Bourgogne - LEG/Fargo (Research center in Finance,organizational ARchitecture and GOvernance). [Downloadable!]
  12. Gérard Charreaux, 2004. "Corporate Governance Theories: From Micro Theories to National Systems Theories," Working Papers FARGO 1041202, Université de Bourgogne - LEG/Fargo (Research center in Finance,organizational ARchitecture and GOvernance). [Downloadable!]
  13. Levine, Ross, 1990. "Stock markets, growth, and policy," Policy Research Working Paper Series 484, The World Bank. [Downloadable!]
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  14. Florian Pelgrin, 2004. "Contraintes de liquidité et capital humain dans une petite économie ouverte," Working Papers 04-13, Bank of Canada. [Downloadable!]
  15. Wendy Carlin & Colin Mayer, 1999. "Finance, Investment and Growth," OFRC Working Papers Series 1999fe09, Oxford Financial Research Centre. [Downloadable!]
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  16. Hoekman, Bernard & Smarzynska Javorcik, Beata, 2004. "Policies facilitating firm adjustment to globalization," Policy Research Working Paper Series 3441, The World Bank. [Downloadable!]
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  17. Impavido, Gregorio & Musalem, Alberto R. & Tressel, Thierry, 2001. "Contractual savings institutions and banks'stability and efficiency," Policy Research Working Paper Series 2751, The World Bank. [Downloadable!]
  18. Rogério Studart, 2001. "Integrating Uneven Partners: the Destabilizing Effects of Financial Liberalization and Internationalization of Latin American Economies," Anais do XXIX Encontro Nacional de Economia [Proceedings of the 29th Brazilian Economics Meeting] 045, ANPEC - Associação Nacional dos Centros de Pósgraduação em Economia [Brazilian Association of Graduate Programs in Economics]. [Downloadable!]
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