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Financial indicators and growth in a cross section of countries

  • King, Robert G.
  • Levine, Ross

The authors use existing measures of the financial system - and construct many new measures - to document the relationship between the financial system and long-run growth in a cross-section of countries between 1960 and 1989. They consider various measures of the size of the financial system, the importance of different financial institutions, the financial system's allocation of credit, the financial system's efficiency, and the degree of financial repression. They use graphs, correlations, and regressions to gauge the robustness of the partial correlation between growth and the financial indicators. They also examine two channels through which financial indicators may be linked to growth: the share of GDP allocated to investment; and the efficiency with which resources are used. They find that many of the financial system indicators are significantly correlated with growth through both investment and efficiency. Moreover, many of these partial correlations remain strong after controlling for initial conditions, dummy variables for Africa and Latin America, and measures of monetary, fiscal, and trade performance. Their analysis suggests that it is empirically important to identify which financial intermediaries aredoing the intermediation and to whom the financial system is allocating credit rather than simply using proxies for the overall size of the financial system, as has been common in past studies.

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Paper provided by The World Bank in its series Policy Research Working Paper Series with number 819.

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Date of creation: 31 Jan 1992
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Handle: RePEc:wbk:wbrwps:819
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  1. De Long, J Bradford & Summers, Lawrence H, 1991. "Equipment Investment and Economic Growth," The Quarterly Journal of Economics, MIT Press, vol. 106(2), pages 445-502, May.
  2. Lucas, Robert Jr., 1988. "On the mechanics of economic development," Journal of Monetary Economics, Elsevier, vol. 22(1), pages 3-42, July.
  3. Bencivenga, V.R. & Smith, B.D., 1990. "Deficits, Inflation, And The Banking System In Developing Countries: The Optimal Degree Of Financial Repression," RCER Working Papers 214, University of Rochester - Center for Economic Research (RCER).
  4. Levine, Ross, 1991. " Stock Markets, Growth, and Tax Policy," Journal of Finance, American Finance Association, vol. 46(4), pages 1445-65, September.
  5. Barro, Robert J, 1991. "Economic Growth in a Cross Section of Countries," The Quarterly Journal of Economics, MIT Press, vol. 106(2), pages 407-43, May.
  6. Levine, Ross & Renelt, David, 1992. "A Sensitivity Analysis of Cross-Country Growth Regressions," American Economic Review, American Economic Association, vol. 82(4), pages 942-63, September.
  7. Giovannini, Alberto & de Melo, Martha, 1990. "Government revenue from financial repression," Policy Research Working Paper Series 533, The World Bank.
  8. Gertler, M. & Rose, A., 1991. "Finance, growth, and public policy," Policy Research Working Paper Series 814, The World Bank.
  9. Roubini, Nouriel & Sala-i-Martin, Xavier, 1992. "Financial repression and economic growth," Journal of Development Economics, Elsevier, vol. 39(1), pages 5-30, July.
  10. Gelb, Alan H., 1989. "Financial policies, growth, and efficiency," Policy Research Working Paper Series 202, The World Bank.
  11. Stiglitz, Joseph E, 1989. "Financial Markets and Development," Oxford Review of Economic Policy, Oxford University Press, vol. 5(4), pages 55-68, Winter.
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