Finance and the sources of growth

Finance and the sources of growth This paper evaluates the empirical relation between the level of financial intermediary development and (i) economic growth, (ii) total factor productivity growth, (iii) physical capital accumulation, and (iv) private savings rates. We use (a) a pure cross-country instrumental variable estimator to extract the exogenous component of financial intermediary development, and (b) a new panel technique that controls for biases associated with simultaneity and unobserved country-specific effects. After controlling for these potential biases, we find that (1) financial intermediaries exert a large, positive impact on total factor productivity growth, which feeds through to overall GDP growth and (2) the long-run links between financial intermediary development and both physical capital growth and private savings rates are tenuous. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Financial Economics Elsevier

Finance and the sources of growth

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Publisher
Elsevier
Copyright
Copyright © 2000 Elsevier Science B.V.
ISSN
0304-405x
DOI
10.1016/S0304-405X(00)00072-6
Publisher site
See Article on Publisher Site

Abstract

This paper evaluates the empirical relation between the level of financial intermediary development and (i) economic growth, (ii) total factor productivity growth, (iii) physical capital accumulation, and (iv) private savings rates. We use (a) a pure cross-country instrumental variable estimator to extract the exogenous component of financial intermediary development, and (b) a new panel technique that controls for biases associated with simultaneity and unobserved country-specific effects. After controlling for these potential biases, we find that (1) financial intermediaries exert a large, positive impact on total factor productivity growth, which feeds through to overall GDP growth and (2) the long-run links between financial intermediary development and both physical capital growth and private savings rates are tenuous.

Journal

Journal of Financial EconomicsElsevier

Published: Jan 1, 2000

References

  • Endogenous Growth Theory
    Aghion, P; Howitt, P
  • Another look at the instrumental-variable estimation of error-components models
    Arellano, M; Bover, O
  • Financial markets in development, and the development of financial markets
    Greenwood, J; Smith, B

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