NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Financial Development and Growth in the Short and Long Run

Raymond Fisman, Inessa Love

NBER Working Paper No. 10236
Issued in January 2004
NBER Program(s):   CF   EFG

We analyze the relationship between financial development and inter-industry resource allocation in the short- and long-run. We suggest that in the long-run, economies with high rates of financial development will devote relatively more resources to industries with a 'natural' reliance on outside finance due to a comparative advantage in these industries. By contrast, in the short-run we argue that financial development facilitates the reallocation of resources to industries with good growth opportunities, regardless of their reliance on outside finance. To test these predictions, we use a measure of industry-level 'technological' financial dependence based on the earlier work of Rajan and Zingales (1998), and develop new proxies for shocks to (short run) industry growth opportunities. We find differential effects of these measures on industry growth and composition in countries with different levels of financial development. We obtain results that are consistent with financially developed economies specializing in 'financially dependent' industries in the long-run, and allocating resources to industries with high growth opportunities in the short-run.

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Document Object Identifier (DOI): 10.3386/w10236

Published: Fisman, Raymond and Inessa Love. "FINANCIAL DEVELOPMENT AND INTERSECTORAL ALLOCATION: A NEW APPROACH." Journal of Finance, 2005.

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