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Stock markets, growth, and policy

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  • Levine, Ross

Abstract

This paper shows how stock markets can accelerate growth and how policy can affect that growth either directly (by altering investment incentives) or indirectly (by changing the incentives underlying the creation of financial contracts). To help explain the role of financial markets in economic development, an endogenous growth model in which a stock market emerges to allocate risk was constructed. The model explores how the stock market alters investment incentives in ways that change steady-state growth rates. This paper demonstrates that stock markets can accelerate growth by: (a) facilitating the ability to trade ownership of firms without disrupting the productive processes occurring within firms; and (b) allowing agents to diversify portfolios across firms.

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  • Levine, Ross, 1990. "Stock markets, growth, and policy," Policy Research Working Paper Series 484, The World Bank.
    • Handle: RePEc:wbk:wbrwps:484
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    References listed on IDEAS

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    1. Romer, Paul M, 1986. "Increasing Returns and Long-run Growth," Journal of Political Economy, University of Chicago Press, vol. 94(5), pages 1002-1037, October.
    2. Ross Levine, 1990. "Financial structure and economic development," International Finance Discussion Papers 381, Board of Governors of the Federal Reserve System (U.S.).
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    Cited by:

    1. Roubini, Nouriel & Sala-i-Martin, Xavier, 1995. "A growth model of inflation, tax evasion, and financial repression," Journal of Monetary Economics, Elsevier, vol. 35(2), pages 275-301, April.
    2. Patrick Artus, 1993. "Croissance endogène : revue des modèles et tentatives de synthèse," Revue Économique, Programme National Persée, vol. 44(2), pages 189-228.
    3. Ms. Jacqueline T Irving, 2005. "Regional Integration of Stock Exchanges in Eastern and Southern Africa: Progress and Prospects," IMF Working Papers 2005/122, International Monetary Fund.
    4. Maciej Wysocki, 2016. "Institutional Complementarity of Poland in Terms of Diversity of Capitalism," International Economics, University of Lodz, Faculty of Economics and Sociology, issue 14, pages 133-157, June.
    5. Levine, Ross & Renelt, David, 1991. "Cross-country studies of growth and policy : methodological, conceptual, and statistical problems," Policy Research Working Paper Series 608, The World Bank.
    6. Corbo, Vittorio & Fischer, Stanley, 1991. "Adjustment programs and Bank support : rationale and main results," Policy Research Working Paper Series 582, The World Bank.
    7. Atish R. Ghosh & Holger Wolf, 1998. "Thresholds and Context Dependence in Growth," NBER Working Papers 6480, National Bureau of Economic Research, Inc.
    8. Easterly, William & Kremer, Michael & Pritchett, Lant & Summers, Lawrence H., 1993. "Good policy or good luck?: Country growth performance and temporary shocks," Journal of Monetary Economics, Elsevier, vol. 32(3), pages 459-483, December.
    9. Renelt, David, 1991. "Economic growth : a review of the theoretical and empirical literature," Policy Research Working Paper Series 678, The World Bank.
    10. Sinan Esen & Korhan Gokmenoglu, 2016. "Financial Centres Index and GDP Growth," International Journal of Economics and Finance, Canadian Center of Science and Education, vol. 8(4), pages 198-206, April.

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