Abstract
This article provides evidence that financial development impacts growth by reducing financing constraints that would otherwise distort efficient allocation of investment. The financing constraints are inferred from the investment Euler equation by assuming that the firm's stochastic discount factor is a function of the firm's financial position (specifically, the stock of liquid assets). The magnitude of the changes in the cost of capital is twice as large in a country with a low level of financial development as in a country with an average level of financial development. The size effect, business cycles, and legal environment effects are also considered.
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
