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Finance and Growth in Developing Countries: Sound Principles and Unreliable Evidence

  • Valpy FitzGerald (QEH)
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    Financial development and economic growth are clearly related, yet the institutional channels and even the direction of causality remain unresolved theoretical issues. None the less, and despite the persistence of a wide range of organizational forms in advanced economies, strong causality from particular forms of organization of financial institutions towards rapid economic growth has become a central axiom of orthodox development economics, recently strengthened by the empirical findings of 'new institutional' economists. This chapter argues that this canonical literature is deeply flawed both methodologically and empirically. Further, the observed consequences of financial liberalisation for savings and investment on the one hand, and for macroeconomic stability on the other, suggest that an alternative interpretation of the relationship between finance and growth in developing countries is more plausible: leading to quite different policy prescriptions.

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    File URL: http://www3.qeh.ox.ac.uk/RePEc/qeh/qehwps/qehwps153.pdf
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    Paper provided by Queen Elizabeth House, University of Oxford in its series QEH Working Papers with number qehwps153.

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    Handle: RePEc:qeh:qehwps:qehwps153
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    1. Helmut Reisen, 1998. "Domestic Causes of Currency Crises: Policy Lessons for Crisis Avoidance," OECD Development Centre Working Papers 136, OECD Publishing.
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    4. Caprio, Gerard & Honohan, Patrick, 2001. "Finance for Growth: Policy Choices in a Volatile World," MPRA Paper 9929, University Library of Munich, Germany.
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    7. Demirguc-Kunt, Asli & Maksimovic, Vojislav, 1995. "Stock market development and firm financing choices," Policy Research Working Paper Series 1461, The World Bank.
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