Finance and the Sources of Growth at Various Stages of.pdf

Finance and the Sources of Growth at Various Stages of Economic Development Felix Rioja and Neven Valev Andrew Young School of Policy Studies Department of Economics Georgia State University March 2003 Abstract This paper studies the effects of financial development on the sources of growth in different groups of countries. Recent theoretical work shows that financial development may affect productivity and capital accumulation in different ways in industrial versus developing countries. This hypothesis is tested with panel data from 74 countries using GMM dynamic panel techniques. Results are consistent with the hypothesis: finance has a strong positive influence on productivity growth primarily in more developed economies. In less developed economies, the effect of finance on output growth occurs primarily through capital accumulation. JEL Classification: O4, G1. Key words: Financial development, economic growth, productivity, capital accumulation. ______________________ ____________________________________________ The authors would like to thank Piriya Pholpirul and Abel Embaye for their excellent research assistance. Contact information: Department of Economics, Andrew Young School of Policy Studies, Georgia State University, Atlanta, GA 30303. e-mail: prcfkr@langate.gsu.edu (Rioja), nvalev@gsu.edu (Valev). Finance and the Sources of Growth at Various Stages of Economic Development I. Introduction The effects of financial development on economic growth have been widely discussed in the academic literature. The increased availa