Stock Markets, Banks, and Economic Growth

52 Pages Posted: 6 Jan 2005

See all articles by Ross Levine

Ross Levine

Stanford University; National Bureau of Economic Research (NBER)

Sara Zervos

World Bank

Multiple version iconThere are 2 versions of this paper

Date Written: December 1996


Do well-functioning stock markets and banks promote long-term economic growth? Yes, but stock markets and banks differ in the financial services they provide.

Using data on 49 countries from 1976 to 1993, the authors investigate whether measures of stock market liquidity, size, volatility, and integration in world capital markets predict future rates of economic growth, capital accumulation, productivity improvements, and private savings.

They find that stock market liquidity-as measured by stock trading relative to the size of the market and economy - is positively and significantly correlated with current and future rates of economic growth, capital accumulation, productivity growth, even after controlling for economic and political factors.

Stock market size, volatility, and integration are not robustly linked with growth. Nor are financial indicators closely associated with private savings rates.

Significantly, banking development - as measured by bank loans to private enterprises divided by GDP - when combined with stock market liquidity predicts future rates of growth, capital accumulation, and productivity growth when entered together in regressions. The authors determine that these results are consistent with views that (1)financial markets and institutions provide important services for long-run growth, and (2)stock markets and banks provide different financial services.

This paper - a product of the Finance and Private Sector Development Division, Policy Research Department - is part of a larger effort in the department to understand the links between the financial system and economic growth. The study was funded by the Bank's Research Support Budget under the research project "Stock Market Development and Financial Intermediary Growth" (RPO 679-53).

JEL Classification: G00, O16, F36

Suggested Citation

Levine, Ross and Zervos, Sara, Stock Markets, Banks, and Economic Growth (December 1996). Available at SSRN:

Ross Levine (Contact Author)

Stanford University ( email )

Stanford, CA 94305
United States

National Bureau of Economic Research (NBER)

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Sara Zervos

World Bank ( email )

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Washington, DC 20433
United States