Short-Run Costs of Financial Market Development in Industrialized Economies
Large increases in the financial sector share of GDP in industrialized countries fail to be reflected in higher short-run growth, although a positive long-run relation between financial development and growth is well documented. To reconcile these facts a model of financial development is derived, where short-run growth effects are negative. The crucial mechanism is a trade-off between financial and technological diversification. Fixed financial market costs imply that financial market extensions cause a slump in growth rates, recovering as specialization increases, while saving rates probably decrease also in the long run. Empirical patterns in recent research are consistent with these predictions.
Volume (Year): 26 (2000)
Issue (Month): 2 (Spring)
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