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Finance and Growth: Is there a relationship?

Finance and Growth: Is there a relationship?. Joanna Rymaszewska & Elizabeth Rivard 8 January 2008 MADE Warsaw University. Remarkably Consistent Results. Countries with better-developed financial systems grow faster No simultaneity bias between FD and growth FD eases financial constraints

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Finance and Growth: Is there a relationship?

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  1. Finance and Growth: Is there a relationship? Joanna Rymaszewska & Elizabeth Rivard 8 January 2008 MADE Warsaw University

  2. Remarkably Consistent Results • Countries with better-developed financial systems grow faster • No simultaneity bias between FD and growth • FD eases financial constraints • Local FD matters MADE Warsaw University

  3. Critique • Methodological shortcomings • Measurement issues (depth, turnover ratio-LZ) • Data problems-empirical proxies • Issue of causality remains (KL) • Limited breadth of research (KL, LZ) • Studies do not take into account the market integration • Channels of FD-excluded FDI • Negative effects of FD • Neglect effect on total factor productivity growth MADE Warsaw University

  4. But the real question is... • If financial development is crucial for growth, how can countries develop well-functioning financial systems? • FD is more important for developing countries MADE Warsaw University

  5. How? • Legal infrastructure threshold • Sequencing • Trade openness—capital account liberalisation • Banking system development—equity market development MADE Warsaw University

  6. If finance is indeed so good, why don’t we see more of it? • What causes financial development or a lack of it? MADE Warsaw University

  7. Does financial development cause growth? • We still do not have the smoking gun! MADE Warsaw University

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