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Short-Run Costs of Financial Market Development in Industrialized Economies


  • Thomas Lindh

    (Uppsala University
    Institute for Futures Study)


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.

Suggested Citation

  • Thomas Lindh, 2000. "Short-Run Costs of Financial Market Development in Industrialized Economies," Eastern Economic Journal, Eastern Economic Association, vol. 26(2), pages 221-239, Spring.
  • Handle: RePEc:eej:eeconj:v:26:y:2000:i:2:p:221-239

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    References listed on IDEAS

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    8. Jacobson Tor & Lindh Thomas & Warne Anders, 2002. "Growth, Saving, Financial Markets, and Markov Switching Regimes," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 5(4), pages 1-20, January.
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    Cited by:

    1. Jacobson Tor & Lindh Thomas & Warne Anders, 2002. "Growth, Saving, Financial Markets, and Markov Switching Regimes," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 5(4), pages 1-20, January.
    2. Felix Rioja & Neven Valev, 2004. "Finance and the Sources of Growth at Various Stages of Economic Development," Economic Inquiry, Western Economic Association International, vol. 42(1), pages 127-140, January.
    3. Hou, Han & Cheng, Su-Yin, 2017. "The dynamic effects of banking, life insurance, and stock markets on economic growth," Japan and the World Economy, Elsevier, vol. 41(C), pages 87-98.
    4. Su-Yin Cheng & Chia-Cheng Ho & Han Hou, 2014. "The Finance-growth Relationship and the Level of Country Development," Journal of Financial Services Research, Springer;Western Finance Association, vol. 45(1), pages 117-140, February.
    5. Majumder, Md. Alauddin & Eff, E. Anthon, 2012. "The link between economic growth and financial development: Evidence from districts of Bangladesh," MPRA Paper 44122, University Library of Munich, Germany.

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    JEL classification:

    • A11 - General Economics and Teaching - - General Economics - - - Role of Economics; Role of Economists


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