The state of development of the financial sector does not change monotonically over time. In particular, by most measures, countries were more financially developed in 1913 than in 1980 and only recently have they surpassed their 1913 levels. To explain these changes, we propose an interest group theory of financial development where incumbents oppose financial development because it breeds competition. The theory predicts that incumbents' opposition will be weaker when an economy allows both cross-border trade and capital flows. This theory can go some way in accounting for the cross-country differences in, and the time-series variation of, financial development.

This paper reviews, appraises, and critiques theoretical and empirical research on the connections between the operation of the financial system and economic growth. While subject to ample qualifications and countervailing views, the preponderance of evidence suggests that both financial intermediaries and markets matter for growth and that reverse causality alone is not driving this relationship. Furthermore, theory and evidence imply that better developed financial systems ease external financing constraints facing firms, which illuminates one mechanism through which financial development influences economic growth. The paper highlights many areas needing additional research.

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participants at the Georgia Tech Conference on International Finance. This paper uses religion and language as proxies for culture and investigates how these proxies are related to investor rights. We find that a country’s principal religion helps predict the cross-sectional variation in creditor rights better than a country’s openness to international trade, its language, its income per capita, or the origin of its legal system. Catholic countries protect the rights of creditors less than other countries and have less private long-term debt. A country’s openness to international trade mitigates the influence of religion on creditor rights. Our culture proxies are also important predictors of how countries enforce rights, but they have little correlation with shareholder rights. 1 See Levine (1997) for a review of the literature. 1 “Max Weber was right. If we learn anything from the history of economic development, it is that culture makes almost all of the difference.” Landes (2000)

This paper investigates the impact of stock markets and banks on economic growth using a panel data set for the period 1976-98 and applying recent GMM techniques developed for dynamic panels. On balance, we find that stock markets and banks positively influence economic growth and these findings are not due to potential biases induced by simultaneity, omitted variables or unobserved country-specific effects.

We develop a framework for conceptualizing and measuring corporate transparency at the country level. We perform factor analysis to explore the structure underlying the measures of countries ’ firm-specific information environments from our transparency framework. Our factor analysis isolates two factors. The first factor, interpreted as financial transparency, primarily captures the intensity and timeliness of financial disclosures, and their interpretation and dissemination by analysts and the media. The second factor, interpreted as governance transparency, primarily captures the intensity of governance disclosures (the identity, remuneration, and shareholdings of officers and directors, identity and holdings of other major shareholders) and, to a lesser extent, the intensity and timeliness of financial disclosures. We estimate multivariate, cross-country regressions to investigate hypothesized determinants of the financial and governance transparency factors. Our results suggest that, after controlling for the general level of economic development as measured by per capita GNP, financial transparency is lower in countries characterized by high risk of expropriation of the firms ’ assets or profits by the State, consistent with firms suppressing the availability of financial

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This paper provides evidence of a causal and economically important effect of financial development on volatility. In contrast to the existing literature, the identification strategy is based on the differences in sensitivities to financial conditions across industries. The results show that sectors with larger liquidity needs are more volatile and experience deeper crises in financially underdeveloped countries. At the macro level, the results suggest that changes in financial development can generate important differences in aggregate volatility. An additional finding of this paper is that financially underdeveloped countries partially protect themselves from volatility by concentrating less output in sectors with large liquidity needs. Nevertheless, this insulation mechanism seems to be insufficient to reverse the effects of financial underdevelopment on within-sector volatility. Finally, this paper provides new evidence that: (i) financial development affects volatility mainly through the intensive margin (output per firm); (ii) both, the quality of information generated by firms, and the development of financial intermediaries, have independent effects on sectoral volatility, (iii) the development of financial intermediaries is more important than the development of equity markets for the reduction of volatility. I am grateful to Daron Acemoglu and Ricardo Caballero for extremely helpful comments and discussion.

Institutions — quality of contract enforcement, property rights, shareholder protec-tion, and the like — have received a great deal of attention in recent years. Yet trade theory has not considered the implications of institutional differences, beyond treating them simply as different technologies or taxes. The purpose of this paper is twofold. First, we propose a simple model of international trade in which institutional differ-ences are modeled within the framework of incomplete contracts. We show that doing so reverses many of the conclusions obtained by equating institutions with productiv-ity. Institutional differences as a source of comparative advantage imply, among other things, that the less developed country may not gain from trade, and factor prices may actually diverge as a result of trade. Second, we test empirically whether institutions act as a source of trade, using data on US imports disaggregated by country and industry. The empirical results provide evidence of “institutional content of trade: ” institutional differences are an important determinant of trade flows.

The statistical analysis of firm-level data on U.S. multinational companies was conducted at the International Investment Division, Bureau of Economic Analysis, U.S. Department of Commerce under arrangements that maintain legal confidentiality requirements. The views expressed are those of the authors