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The effect of financial development on convergence: theory and evidence

Aghion, P.; Howitt, P.; Mayer-Foulkes, D.; (2005) The effect of financial development on convergence: theory and evidence. Quarterly Journal of Economics , 120 (1) pp. 173-222. 10.1162/qjec.2005.120.1.173. Green open access

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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.

Type: Article
Title: The effect of financial development on convergence: theory and evidence
Open access status: An open access version is available from UCL Discovery
DOI: 10.1162/qjec.2005.120.1.173
Publisher version: http://dx.doi.org/10.1162/qjec.2005.120.1.173
Language: English
Additional information: © 2005 by the President and Fellows of Harvard College and the Massachusetts Institute of Technology. Please see http://eprints.ucl.ac.uk/17784/ for the working paper version
Keywords: Convergence, development, growth
UCL classification: UCL > Provost and Vice Provost Offices > UCL SLASH > Faculty of S&HS > Dept of Economics
URI: https://discovery.ucl.ac.uk/id/eprint/17711
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