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The co-evolution of the real and financial sectors in the growth process


  • John H. Boyd
  • Bruce D. Smith


We produce a theoretical framework that helps explain the co-evolution of the real and financial sectors of an economy in the growth process, as described by Gurley and Shaw. According to them, self-financed capital investment first gives way to debt finance and later to the emergence of equity as an additional instrument for raising funds externally. As the economy develops further, the aggregate ratio of debt to equity will generally fall. We analyze that portion of their account concerning the evolution of equity markets. We show that in an important sense, debt and equity are complementary sources for the financing of capital investments.

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  • John H. Boyd & Bruce D. Smith, 1996. "The co-evolution of the real and financial sectors in the growth process," Working Papers 541, Federal Reserve Bank of Minneapolis.
  • Handle: RePEc:fip:fedmwp:541

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    References listed on IDEAS

    1. Geweke, John, 1989. "Bayesian Inference in Econometric Models Using Monte Carlo Integration," Econometrica, Econometric Society, vol. 57(6), pages 1317-1339, November.
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    7. Engle, Robert & Granger, Clive, 2015. "Co-integration and error correction: Representation, estimation, and testing," Applied Econometrics, Publishing House "SINERGIA PRESS", vol. 39(3), pages 106-135.
    8. John F. Geweke, 1991. "Evaluating the accuracy of sampling-based approaches to the calculation of posterior moments," Staff Report 148, Federal Reserve Bank of Minneapolis.
    9. BAUWENS, Luc & LUBRANO , Michel, 1994. "Identification Restrictions and Posterior Densities in Cointegrated Gaussian VAR Systems," CORE Discussion Papers 1994018, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
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    Equity ; Debt;


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