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Growth and Finance

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  • John Driffill

    (Birkbeck College, University of London)

Abstract

I review selectively some of the trends in research on the relationships between financial markets and economic growth. Economic theory provides many arguments as to why, given the widespread existence of moral hazard and adverse selection problems in financial transactions, more highly developed financial markets might facilitate faster economic growth. However, it is less clear that summary measures of financial development and structure, widely used in empirical research, are adequate. I review some recent empirical work in this area, and show that apparent effects of financial development on growth may be capturing regional differences, and other factors. There appears to be little empirical support for an effect of financial structure on growth. Much empirical work in this field uses data over short periods of time, of a few decades in length. Looking over longer periods, non-financial forces of increasing returns in production, increasing returns to agglomeration and falling transport costs appear more important, and the potential role of financial markets rather less. The question of whether finance plays a causal role or merely follows economic development remains an open one. Copyright Blackwell Publishing Ltd and The Victoria University of Manchester, 2003.

Suggested Citation

  • John Driffill, 2003. "Growth and Finance," Manchester School, University of Manchester, vol. 71(4), pages 363-380, July.
  • Handle: RePEc:bla:manchs:v:71:y:2003:i:4:p:363-380
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    References listed on IDEAS

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    Cited by:

    1. Alex Trew, 2006. "Finance and Growth: A Critical Survey," The Economic Record, The Economic Society of Australia, vol. 82(259), pages 481-490, December.
    2. Trew, Alex, 2008. "Efficiency, depth and growth: Quantitative implications of finance and growth theory," Journal of Macroeconomics, Elsevier, vol. 30(4), pages 1550-1568, December.
    3. Max Gillman & Michal Kejak, 2007. " Inflation, Financial Development and Human Capital-Based Endogenous Growth: an Explanation of Ten Empirical Findings," CDMA Conference Paper Series 0703, Centre for Dynamic Macroeconomic Analysis.
    4. Dimitrios Varvarigos & Keith Blackburn, 2005. "Growth, Uncertainty and Finance," Money Macro and Finance (MMF) Research Group Conference 2005 12, Money Macro and Finance Research Group.
    5. Colin Kirkpatrick, 2005. "Finance and Development: Overview and Introduction," Journal of Development Studies, Taylor & Francis Journals, vol. 41(4), pages 631-635.
    6. Franz R. Hahn, 2005. "Finance-Growth Nexus and the P-bias: Evidence from OECD Countries," Economic Notes, Banca Monte dei Paschi di Siena SpA, vol. 34(1), pages 113-126, February.
    7. James B. Ang, 2008. "A Survey Of Recent Developments In The Literature Of Finance And Growth," Journal of Economic Surveys, Wiley Blackwell, vol. 22(3), pages 536-576, July.
    8. Mark A Roberts, "undated". "The conflating effects of education and financial competition in an OLG growth model with Nelson-Phelps human capital," Discussion Papers 12/07, University of Nottingham, Centre for Finance, Credit and Macroeconomics (CFCM).

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