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The Role of Financial Development in Growth and Investment

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Abstract

Thisarticle decomposes the well-documented relationship between financialdevelopment and growth. We examine whether financial developmentaffects growth solely through its contribution to growth in ``primitives'' or factor accumulation rates or whether it alsohas a positive impact on total factor productivity growth. Ourresults suggest that indicators of financial development arecorrelated with both total factor productivity growth and investment.However, the indicators that are correlated with total factorproductivity growth differ from those that encourage investment.In addition, many of the results are sensitive to the inclusionof country fixed effects, which may indicate that the financialdevelopment indicators are proxying for broader country characteristics.

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Authors and Affiliations

  1. New York University, New york

    Jess Benhabib

  2. Economic Research, Federal Reserve Bank of San Francisco, 101 Market Street, San Francisco, CA, 94105

    Mark M. Spiegel

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  1. Jess Benhabib
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  2. Mark M. Spiegel
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Benhabib, J., Spiegel, M.M. The Role of Financial Development in Growth and Investment. Journal of Economic Growth 5, 341–360 (2000). https://doi.org/10.1023/A:1026599402490

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