Financial Systems, Economic Growth, and Globalization
Working Paper No. 01-W19
Peter L. Rousseau and Richard Sylla
ABSTRACT [article]
This paper brings together two strands of the economic literature -- that on the finance-growth nexus and that on capital market
integration -- and explores key issues surrounding each strand through
both institutional/country histories and formal quantitative analysis.
We begin with studies of the Dutch Republic, England, the U.S., France,
Germany and Japan that span three centuries, detailing how in each
case the emergence of a financial system jump-started economic growth.
Using a cross-country panel of seventeen countries covering the 1850-1997
period, we then uncover a robust correlation between financial factors
and economic growth that is consistent with a leading role for finance,
and show that these effects were strongest over the 80 years preceding
the Great Depression. Next, we show that countries with more
sophisticated financial systems engage in more trade and appear to be
better integrated with other economies by identifying roles for both
finance and trade in the convergence of interest rates that occurred
among the Atlantic economies prior to 1914. Our results suggest that
the growth and increasing globalization of these economies might indeed
have been "finance-led."