48 Pages Posted: 5 Nov 1996
Date Written: September 1996
Does finance affect economic growth? A number of studies have identified a positive correlation between the level of development of a country's financial sector and the rate of growth of its per capita income. As has been noted elsewhere, the observed correlation does not necessarily imply a causal relationship. This paper examines whether financial development facilitates economic growth by scrutinizing one rationale for such a relationship; that financial development reduces the costs of external finance to firms. Specifically, we ask whether industrial sectors that are relatively more in need of external finance develop disproportionately faster in countries with more developed financial markets. We find this to be true in a large sample of countries over the 1980s. We show this result is unlikely to be driven by omitted variables, outliers, or reverse causality.
Suggested Citation: Suggested Citation
Rajan, Raghuram G. and Zingales, Luigi, Financial Dependence and Growth (September 1996). NBER Working Paper No. w5758. Available at SSRN: https://ssrn.com/abstract=7872
By Ross Levine
By Robert Lucas