Short-Run Costs of Financial Market Development in Industrialized Economies

Thomas Lindh

Eastern Economic Journal, 2000, vol. 26, issue 2, 221-239

Abstract: Large increases in the financial sector share of GDP in industrialized countries fail to be reflected in higher short-run growth, although a positive long-run relation between financial development and growth is well documented. To reconcile these facts a model of financial development is derived, where short-run growth effects are negative. The crucial mechanism is a trade-off between financial and technological diversification. Fixed financial market costs imply that financial market extensions cause a slump in growth rates, recovering as specialization increases, while saving rates probably decrease also in the long run. Empirical patterns in recent research are consistent with these predictions.

Keywords: Economics (search for similar items in EconPapers)
JEL-codes: A11 (search for similar items in EconPapers)
Date: 2000
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Citations: View citations in EconPapers (7)

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