Financial Development and Growth in the Short and Long Run

Raymond Fisman and Inessa Love

No 10236, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We analyze the relationship between financial development and inter-industry resource allocation in the short- and long-run. We suggest that in the long-run, economies with high rates of financial development will devote relatively more resources to industries with a 'natural' reliance on outside finance due to a comparative advantage in these industries. By contrast, in the short-run we argue that financial development facilitates the reallocation of resources to industries with good growth opportunities, regardless of their reliance on outside finance. To test these predictions, we use a measure of industry-level 'technological' financial dependence based on the earlier work of Rajan and Zingales (1998), and develop new proxies for shocks to (short run) industry growth opportunities. We find differential effects of these measures on industry growth and composition in countries with different levels of financial development. We obtain results that are consistent with financially developed economies specializing in 'financially dependent' industries in the long-run, and allocating resources to industries with high growth opportunities in the short-run.

JEL-codes: G10 O15 (search for similar items in EconPapers)
Date: 2004-01
New Economics Papers: this item is included in nep-cfn, nep-dev, nep-fin, nep-mac and nep-mfd
Note: CF EFG
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (59)

Published as Fisman, Raymond and Inessa Love. "FINANCIAL DEVELOPMENT AND INTERSECTORAL ALLOCATION: A NEW APPROACH." Journal of Finance, 2005.

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