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Financial Architecture and Economic Performance: International Evidence

  • Tadesse, Solomon

The paper examines the relations between the architecture of an economy's financial system - its degree of market orientation - and economic performance in the real sector. We argue that the relative effectiveness of bank-based versus market-based financial systems depends on the strength of the contractual environment and the extent of agency problems in the economy. We find that while market-based systems outperform bank-based systems among countries with developed financial sectors, bank-based systems fare better among countries with underdeveloped financial sectors. Countries dominated by small firms grow faster in bank-based systems and those dominated by larger firms in market-based systems. The findings suggest that recent trends in financial development policies that indiscriminately prescribe market-oriented financial-system-architecture to emerging and transition economies might be misguided because suitable financial architecture, in and of itself, could be a source of value.

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Article provided by Elsevier in its journal Journal of Financial Intermediation.

Volume (Year): 11 (2002)
Issue (Month): 4 (October)
Pages: 429-454

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Handle: RePEc:eee:jfinin:v:11:y:2002:i:4:p:429-454
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/622875

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