The Role of Capital Markets in Economic Growth

Abstract

Capital markets play an important role in the economic development of emerging capital markets. Well functioning markets insure that both corporations and investors get or receive fair prices for their securities. This ensures that valuable projects will be financed and negative value projects will be rejected. Most importantly, we argue that integration into world capital markets will accelerate the growth process. A country that erects to international participation will face a higher cost of capital. This discourages domestic investment and diminishes foreign direct investment. Our analysis indicates that Brazil's cost of equity capital could be lowered if an aggressive program is undertaken to increase the degree of integration with world capital markets.

JEL Classification: F32, 054