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...e simple conditioning information set plus four additional policy variables, that have been identified by the empirical growth literature as being correlated with growth performance across countries (=-=Barro 1991-=-; Easterly, Loayza, and Montiel 1997).sWe use the inflation rate and the ratio of government expenditure to GDP as indicators of macroeconomic stability.sWe use the sum of exports and imports as share...

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...wth.sRecent industry-level, firm-level, and event-study investigations, however, suggest that the level of financial intermediary development has a large, causal impact on real per capita GDP growth [=-=Rajan and Zingales 1998-=-; Demirgüç-Kunt and Maksimovic 1998; Jayaratne and Strahan 1996].sUsing both pure cross-countrysinstrumental variables procedures as well as dynamic panel techniques, Levine, Loayza, and Beck (1999) s...

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...re accurate information about production technologies and by exerting corporate control, better financial intermediaries can enhance resource allocation and accelerate growth [Boyd and Prescott 1986; =-=Greenwood and Jovanovic 1990-=-; King and Levine 1993b].sSimilarly, by facilitating risk management, improving the liquidity of assets available to savers, and reducing trading costs, financial intermediaries can encourage investme...

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...lative to GDP.sThis measure more carefully distinguishes who is conducting the intermediation, to where the funds are flowing, and we more accurately deflate financial stocks than past studies [e.g., =-=King and Levine 1993-=-a,b].sFinally, we check our results using the King and Levine (1993a,b) and Levine and Zervos (1998) measures of financial intermediation after extending their sample periods and deflating correctly. ...

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...stigations, however, suggest that the level of financial intermediary development has a large, causal impact on real per capita GDP growth [Rajan and Zingales 1998; Demirgüç-Kunt and Maksimovic 1998; =-=Jayaratne and Strahan 1996-=-].sUsing both pure cross-countrysinstrumental variables procedures as well as dynamic panel techniques, Levine, Loayza, and Beck (1999) show thatsthe strong, positive relationship between the level of...

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...ating risk management, improving the liquidity of assets available to savers, and reducing trading costs, financial intermediaries can encourage investment in higher-return activities [Obstfeld 1994; =-=Bencivenga and Smith 1991-=-; Greenwood and Smith 1997].sThe effect of better financial intermediaries on savings, however, is theoretically ambiguous.sHigher returns ambiguously affect saving rates due to well-known income and ...

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...development is a good predictor of economic growth even after controlling for many other country characteristics.sTime-series studies confirm that finance predicts growth [Neusser and Kugler 1998 and =-=Rousseau and Wachtel 1998-=-].sOne shortcoming of these papers is that financial intermediary development may be a leading indicator but not an underlying cause of economic growth.sRecent industry-level, firm-level, and event-st...

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...oving the liquidity of assets available to savers, and reducing trading costs, financial intermediaries can encourage investment in higher-return activities [Obstfeld 1994; Bencivenga and Smith 1991; =-=Greenwood and Smith 1997-=-].sThe effect of better financial intermediaries on savings, however, is theoretically ambiguous.sHigher returns ambiguously affect saving rates due to well-known income and substitution effects.sAlso...

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...l of financial intermediary development is a good predictor of economic growth even after controlling for many other country characteristics.sTime-series studies confirm that finance predicts growth [=-=Neusser and Kugler 1998-=- and Rousseau and Wachtel 1998].sOne shortcoming of these papers is that financial intermediary development may be a leading indicator but not an underlying cause of economic growth.sRecent industry-l...

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...counts, which is commonly taken to be between 0.3 and 0.4.sBesides this traditional measure, we also control for human capital accumulation in computing TFP growth (using both the Mankiw 1995 and the =-=Bils and Klenow 1998-=- specifications).sSince these alternative productivity growth measures produce similar results, we report only the results with the simple, traditional TFP measure.4 Finally, this paper also uses an i...

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...ated 10 coefficient on the time trend as the growth rate.sThis procedure is more robust to differences in the serial correlation properties of the data than simply using the geometric rate of growth [=-=Watson 1992-=-].13sWe do not use least squares growth rates for the panel data because the data are only over five-year periods.sInstead, we calculate real per capita GDP growth as the geometric rate of growth for ...

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...e national income accounts, which is commonly taken to be between 0.3 and 0.4.sBesides this traditional measure, we also control for human capital accumulation in computing TFP growth (using both the =-=Mankiw 1995-=- and the Bils and Klenow 1998 specifications).sSince these alternative productivity growth measures produce similar results, we report only the results with the simple, traditional TFP measure.4 Final...

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...hich is commonly taken to be between 0.3 and 0.4.sBesides this traditional measure, we also control for human capital accumulation in computing TFP growth (using both the Mankiw 1995 and the Bils and =-=Klenow 1998-=- specifications).sSince these alternative productivity growth measures produce similar results, we report only the results with the simple, traditional TFP measure.4 Finally, this paper also uses an i...

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...tal stocks. Researchers typically make an initial estimate of the capital stock in 1950 and then use aggregate investment data and a single depreciation rate to compute capital stocks in later years [=-=King and Levine 1994-=-].sThe figures reported in the paper use capital stocks computed in this way because of data availability.sRecently, however, the Penn-World Tables compiled disaggregated investment data (machinery, t...

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...lopment To control for potential simultaneity bias, we first use instrumental variables developed by LLSV (1998).sLegal systems with European origins can be classified into four major legal families [=-=Reynolds and Flores 1996-=-]: the English common law, and the French, German, and Scandinavian civil law countries. 18sAll four families descend from the Roman law as compiled by Byzantine Emperor Justinian in the sixth century...