Financial Development and Growth in the Short and Long Run

28 Pages Posted: 31 Jan 2004 Last revised: 5 Sep 2009

See all articles by Raymond J. Fisman

Raymond J. Fisman

National Bureau of Economic Research (NBER); Boston University

Inessa Love

World Bank - Development Economics Data Group (DECDG)

Multiple version iconThere are 2 versions of this paper

Date Written: January 2004

Abstract

We analyze the relationship between financial development and inter-industry resource allocation in the short- and long-run. We 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 we 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, we 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. We find differential effects of these measures on industry growth and composition in countries with different levels of financial development. We 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.

Suggested Citation

Fisman, Raymond and Love, Inessa, Financial Development and Growth in the Short and Long Run (January 2004). NBER Working Paper No. w10236. Available at SSRN: https://ssrn.com/abstract=492349

Raymond Fisman (Contact Author)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
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Boston University ( email )

595 Commonwealth Avenue
Boston, MA 02215
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Inessa Love

World Bank - Development Economics Data Group (DECDG) ( email )

1818 H Street, N.W.
Washington, DC 20433
United States

HOME PAGE: http://econ.worldbank.org/staff/ilove

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