The Effect of Financial Development on Convergence

By Philippe Aghion, Peter Howitt, David MAYER-FOULKES. 2005

957 citations recorded by the source corpus.

We introduce imperfect creditor protection in a multicountry Schumpeterian growth model. The theory predicts that any country with more than some critical level of financial development will converge to the growth rate of the world technology frontier, and that all other countries will have a strictly lower long-run growth rate. We present evidence supporting these and other implications, in the form of a cross-country growth regression with a significant and sizable negative coefficient on initial per-capita GDP (relative to the United States) interacted with financial intermediation. In addition, we find that other variables representing schooling, geography, health, policy, politics, and institutions do not affect the significance of the interaction between financial intermediation and initial per capita GDP, and do not show any independent effect on convergence in the regressions. Our findings are robust to removal of outliers and to alternative conditioning sets, estimation procedures, and measures of financial development.

Subfields: Economics and Econometrics, Information Systems

View Paper: https://www.semanticscholar.org/paper/d30b52610563ac860e3fac8691477bcb35dde888

How researchers see this paper

The researchers whose trusted networks rank it highest, strongest advocate first. Every researcher gets a different order.

In Economics and Econometrics

In Information Systems

Citations in the corpus

Does too much finance harm economic growth (2014, background): “Aghion et al. (2005) also show a declining effect of finance and growth as countries grow richer.”
Nonlinearities in financial development–economic growth nexus: Evidence from sub-Saharan Africa (2017, background): “Our equation (3) is further specified in matrix notation expressing n × 1 vectors of Y and by stacking yi and i respectively and the n×m matrices X and Xγ by stacking the vectors xi and xi(γ) | respectively.”
Moving to a New Global Competitiveness Index (2008, background): “43 Ang 2008; Aghion et al. 2007; Levine 2005a; King and Levine 1993; Rajan and Zingales 1998.”
Financial sector development and economic growth: evidence from Cameroon (2017, result): “However, these results contradict with the findings of Aghion et al. (2004) who found an insignificant direct impact of financial development on economic growth and further concluded that the level of credits as a percentage of GDP influences growth only in the intermediary stages of development.”
Appropriate growth policy: a unifying framework (2006, methodology): “For example, human capital constraints as in Howitt and Mayer-Foulkes (2005), or credit constraints as in Aghion, Howitt, and Mayer-Foulkes (2005), make the equilibrium value of µm increasing in a, which turns the growth equation (6) into a non-linear equation.”
Firm Innovation in Emerging Markets: The Role of Finance, Governance, and Competition (2011, background): “Their results are consistent with Aghion et al. (2005), who report a nonmonotonic relationship between R&D expenses and industry concentration.”
Trust and development (2009, background): “Several of these factors include human capital (Islam, 1995), financial development (Aghion et al., 2005; Levine, 1997, 2005; Levine et al., 2000), international capital flows (see Edison et al.”
Creative destruction and firm-specific performance heterogeneity (2007, background): “…absorbing a new technology and consequently exhibiting sustained elevated firm performance heterogeneity; and, more generally, Aghion and Howitt (1992, 1998), Aghion et al. (2004, 2005), Acemoglu et al. (2005, 2006), and other formalizations of Schumpeter’s (1912) concept of creative destruction.”
Knowledge-Based Capital, Innovation and Resource Allocation (2013, background): “…that show a negative relationship between PMR and productivity at the aggregate level (Bouis et al., 2011) and the firm and sectoral levels (Aghion et al., 2004; Bourles et al., 2010) and an inverted U-shaped relationship between indicators of competition and innovation (Aghion et al., 2005).”
OLS and IV estimation of regression models including endogenous interaction terms (2019, methodology): “Irrespective of the method, however, the coe cient of the interaction term is signi cantly di erent from zero in almost all cases, con rming the main result of Aghion et al. (2005) of a nonlinear relation between nancial development and growth.”