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How financial markets affect long run growth : a cross country study

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  • Ghani, Ejaz

Abstract

Empirical studies on new growth theory have tended to ignore financial policy's role in development. The author provides evidence that the initial level of financial development is positively associated with a country's later GDP growth rate, after controlling for the effect of the starting value of human capital and the investment rate. A country that starts with a more developed financial system tends to grow faster because it can make more efficient use of resources. It can do so through several channels, including better evaluation and monitoring of firms, lower transaction costs for financial intermediation, and externalities generated from information collected and processed in financial markets. Policy reform that fosters financial development also has a significant positive effect on the growth rate of real GDP. The empirical evidence presented for 50 developing countries tends to reinforce a classical theme of development economics: the importance of human capital and financial markets.

Suggested Citation

  • Ghani, Ejaz, 1992. "How financial markets affect long run growth : a cross country study," Policy Research Working Paper Series 843, The World Bank.
    • Handle: RePEc:wbk:wbrwps:843
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Levine, Ross & Zervos, Sara, 1996. "Stock Market Development and Long-Run Growth," The World Bank Economic Review, World Bank, vol. 10(2), pages 323-339, May.
    2. Stolbov, Mikhail, 2013. "The finance-growth nexus revisited: From origins to a modern theoretical landscape," Economics - The Open-Access, Open-Assessment E-Journal (2007-2020), Kiel Institute for the World Economy (IfW Kiel), vol. 7, pages 1-22.
    3. Westley, Glenn D. & Shaffer, Sherrill, 1999. "Credit union policies and performance in Latin America," Journal of Banking & Finance, Elsevier, vol. 23(9), pages 1303-1329, September.
    4. Joydeep Biswas, 2008. "Does Finance Lead to Economic Growth? An Empirical Assessment of 12 Asian Economies," Margin: The Journal of Applied Economic Research, National Council of Applied Economic Research, vol. 2(3), pages 229-246, August.
    5. Clarke, George R. G., 1995. "More evidence on income distribution and growth," Journal of Development Economics, Elsevier, vol. 47(2), pages 403-427, August.
    6. Glenn Westley & Sherrill Shaffer, 1997. "Políticas de las asociaciones de crédito y el desempeño en América Latina," Research Department Publications 4087, Inter-American Development Bank, Research Department.
    7. Walid Abdmoulah & Riadh Ben Jelili, 2013. "Access to Finance Thresholds and the Finance-Growth Nexus," Economic Papers, The Economic Society of Australia, vol. 32(4), pages 522-534, December.
    8. Valpy FitzGerald (QEH), "undated". "Finance and Growth in Developing Countries: Sound Principles and Unreliable Evidence," QEH Working Papers qehwps153, Queen Elizabeth House, University of Oxford.
    9. repec:idb:brikps:422 is not listed on IDEAS
    10. Byamugisha, Frank F.K., 1999. "How land registration affects financial development and economic growth in Thailand," Policy Research Working Paper Series 2241, The World Bank.
    11. Christopoulos, Dimitris K. & Tsionas, Efthymios G., 2004. "Financial development and economic growth: evidence from panel unit root and cointegration tests," Journal of Development Economics, Elsevier, vol. 73(1), pages 55-74, February.
    12. TRABELSI, Mohammed, 2002. "Finance and Growth : Empirical Evidence from Developing Countries, 1960-1990," Cahiers de recherche 2002-13, Universite de Montreal, Departement de sciences economiques.

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