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Financial Development Beyond the Formal Financial Market

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  • Lin Shao

Abstract

This paper studies the effects of financial development, taking into account both formal and informal financing. Using cross-country firm-level data, we document that informal financing is utilized more by rich countries than poor countries. To account for this empirical pattern, we build a model in which the supply of informal financing increases with financial development, while the demand for informal financing declines with it. The model generates a hump-shaped relationship between the incidence of informal financing and GDP per capita. Our analysis shows that, at the early stage of economic development, the output loss from financial frictions is reinforced by the low supply of informal financing. Informal financing contributes more to the aggregate output of the richest countries than to that of the poorer countries in our sample.

Suggested Citation

  • Lin Shao, 2018. "Financial Development Beyond the Formal Financial Market," Staff Working Papers 18-49, Bank of Canada.
    • Handle: RePEc:bca:bocawp:18-49
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    File URL: https://www.bankofcanada.ca/wp-content/uploads/2018/09/swp2018-49.pdf
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    Cited by:

    1. Bento, Pedro & Ranasinghe, Ashantha, 2020. "Financial Frictions at Entry, Average Firm Size, and Productivity," Working Papers 2020-7, University of Alberta, Department of Economics, revised 01 Sep 2023.

    More about this item

    Keywords

    Financial markets; Firm dynamics; Productivity;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements
    • O47 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence

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