Financial Development and Growth in the Short and Long Run

The authors analyze the relationship between financial development and inter-industry resource allocation in the short and long run. They suggest that in the long run, economies with high rates of financial development will devote relatively more resources to industries with a "natural" reliance on outside finance due to a comparative advantage in these industries. By contrast, in the short run the authors argue that financial development facilitates the reallocation of resources to industries with good growth opportunities, regardless of their reliance on outside finance. To test these predictions, they use a measure of industry-level "technological" financial dependence based on the earlier work of Rajan and Zingales (1998) and develop new proxies for shocks to (short-run) industry growth opportunities. The authors find differential effects of these measures on industry growth and composition in countries with different levels of financial development. They obtain results that are consistent with financially developed economies specializing in "financially dependent" industries in the long run, and allocating resources to industries with high growth opportunities in the short run.

Bibliographic Details

Main Authors:	Fisman, Raymond, Love, Inessa
Language:	English en_US
Published:	World Bank, Washington, D.C. 2004-05
Subjects:	AUGMENTATION, AVERAGE GROWTH, AVERAGE GROWTH RATE, BANK MONITORING, CAPITAL EXPENDITURES, CAPITAL MARKETS, COMPARATIVE ADVANTAGE, COUNTRY SPECIFIC, DESCRIPTIVE STATISTICS, DEVELOPING COUNTRIES, DIVERSIFICATION, DOMESTIC CREDIT, ECONOMIC ACTIVITY, ECONOMIC DEVELOPMENT, ECONOMIC GROWTH, ECONOMIC LITERATURE, ECONOMICS, FACTOR PRICES, FINANCIAL DEVELOPMENT, FINANCIAL INSTITUTIONS, FINANCIAL MARKETS, FUNCTIONAL FORM, GROWTH PROSPECTS, GROWTH RATES, GROWTH REGRESSION, GROWTH REGRESSIONS, HIGH GROWTH, HUMAN CAPITAL, INCOME, INTERMEDIARIES, IRON, LEGAL ORIGIN, LONG RUN, MARKET CAPITALIZATION, MONETARY ECONOMICS, MORAL HAZARD, MORTALITY, PETROLEUM REFINERIES, POLICY RESEARCH, PRODUCTIVITY, PROMOTING GROWTH, PROPERTY RIGHTS, RESOURCE ALLOCATION, SHORT-RUN GROWTH, SIGNIFICANT IMPACT, SKILLED LABOR, SKILLED WORKERS, STANDARD DEVIATION, TRADE FLOWS CAPITAL MARKETS, CASH FLOWS, CASH GENERATION, EFFICIENT RESOURCE ALLOCATION, EXTERNAL FINANCING, FINANCIAL INTERMEDIARIES, FINANCIAL MARKET DEVELOPMENT,
Online Access:	http://documents.worldbank.org/curated/en/2004/05/4973127/financial-development-growth-short-long-run https://hdl.handle.net/10986/14025
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