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Financing choice and local economic growth: evidence from Brazil

Thiago Silva (), Iftekhar Hasan () and Benjamin Tabak ()

Journal of Economic Growth, 2021, vol. 26, issue 3, No 3, 329-357

Abstract: Abstract We study how financing non-traditional local activities, conceived here as a proxy for activity diversification, is associated with economic growth. We use municipality-level data from Brazil, a country with large geographical, social, and economic disparities observed across its more than 5500 municipalities. We find that finance to non-traditional local activities associates with higher municipal economic growth, suggesting a positive externality between the non-traditional and traditional sectors. Using large natural disasters in Brazil as sources of unexpected negative events, we find that this association between financing non-traditional local activities and economic growth becomes negative in times of distress. We find that traditional local sectors are more affected than non-traditional sectors following a natural disaster. Precisely because of the non-traditional sector’s dependence on the traditional sector, our results suggest that municipalities should restrengthen their traditional activities during adverse conditions.

Keywords: Activity diversification; Financial development; Economic growth; Finance-growth nexus (search for similar items in EconPapers)
JEL-codes: C10 F15 F18 G21 G32 O47 (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1007/s10887-021-09191-0

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