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Finance-Growth Linkage and Risk Diversification. Evidence from OECD Countries

  • Franz R. Hahn

    (WIFO)

Empirical evidence is increasingly emphasising the positive influence of financial markets on the level and the rate of growth of a country's per-capita income. Theoretically, the rationale for the finance-growth nexus appears to be straightforward: in imperfect economies, financial markets provide valuable services such as mobilising savings, diversifying risks, allocating savings to investments, and monitoring the allocation of managers. By performing these services financial markets work as a very important catalyst of economic growth. However, little insight has so far been provided by empirical research as to which of these financial services is most critical for economic growth. Using a panel data set covering 20 OECD countries over the period 1970 through 2000 we present empirical evidence which suggests that the finance-growth nexus in industrialised countries be significantly strengthened by the improvement of risk management and risk diversification made possible by financial innovation and advancement.

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Paper provided by WIFO in its series WIFO Working Papers with number 281.

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Length: 20 pages
Date of creation: 18 Oct 2006
Date of revision:
Handle: RePEc:wfo:wpaper:y:2006:i:281
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  1. W. Scott Frame & Lawrence J. White, 2002. "Empirical studies of financial innovation: lots of talk, little action?," Working Paper 2002-12, Federal Reserve Bank of Atlanta.
  2. M Pesaran & Yongcheol Shin & Ron P Smith, 2004. "Pooled mean group estimation of dynamic heterogeneous panels," ESE Discussion Papers 16, Edinburgh School of Economics, University of Edinburgh.
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  10. Karen E. Dynan & Douglas W. Elmendorf & Daniel E. Sichel, 2005. "Can financial innovation help to explain the reduced volatility of economic activity?," Finance and Economics Discussion Series 2005-54, Board of Governors of the Federal Reserve System (U.S.).
  11. Jaksa Cvitanic & Fernando Zapatero, 2004. "Introduction to the Economics and Mathematics of Financial Markets," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262532654, June.
  12. N. Gregory Mankiw & David Romer & David N. Weil, 1990. "A Contribution to the Empirics of Economic Growth," NBER Working Papers 3541, National Bureau of Economic Research, Inc.
  13. King, Robert G. & Levine, Ross, 1993. "Finance and growth : Schumpeter might be right," Policy Research Working Paper Series 1083, The World Bank.
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  18. King, Robert G. & Levine, Ross, 1993. "Finance and growth : Schumpeter might be right," Policy Research Working Paper Series 1083, The World Bank.
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