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Cited by 962Economic Growth and ProductivityMonetary Policy and Economic ImpactEconomic Growth and Development

The Effect of Financial Development on Convergence: Theory and Evidence*

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Aghion, Philippe, Howitt, Peter, Mayer-Foulkes, David·2005·Quarterly Journal of Economics
DOI 10.1162/qjec.2005.120.1.173
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Abstract

We introduce imperfect creditor protection in a multicountry Schumpeterian growth model. The theory predicts that any country with more than some critical level of financial development will converge to the growth rate of the world technology frontier, and that all other countries will have a strictly lower long-run growth rate. We present evidence supporting these and other implications, in the form of a cross-country growth regression with a significant and sizable negative coefficient on initial per-capita GDP (relative to the United States) interacted with financial intermediation. In addition, we find that other variables representing schooling, geography, health, policy, politics, and institutions do not affect the significance of the interaction between financial intermediation and initial per capita GDP, and do not show any independent effect on convergence in the regressions. Our findings are robust to removal of outliers and to alternative conditioning sets, estimation procedures, and measures of financial development.

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  • Financial development explains the speed with which countries converge to their steady-state output levels, not steady-state growth.

    “Aghion, Howitt, and Mayer-Foulkes (2005) challenge that conclusion and stress that financial development explains the speed with which countries convergence to their steady-state values.”

    From Finance, Growth, and Inequality (2021) · cites this paper as Aghion, Howitt, and Mayer-Foulkes (2005)

    Section III.B says financial development increases the likelihood of convergence to the frontier growth rate, and the discussion of Figure VI relates the estimated convergence parameter to private credit. But the claim’s exclusion of steady-state growth is too broad: the section on divergence in growth rate says that, for countries with sufficiently low financial development, steady-state growth increases with financial development. Page numbers are unavailable for these passages. (LLM, conf=0.88)

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Cites

Flagged first, then by citations

10 of the 115 references couldn’t be matched to a known paper.

Research works printed but not linked: 7

  1. Acemoglu, Daron, and Fabrizio Zilibotti, "Productivity Differences," Quarterly Journal of Economics, CXVI (2001), 563-606.
  2. Aghion, Philippe, Abhijit V. Banerjee, and Thomas Piketty, "Dualism and Mac- roeconomic Volatility," Quarterly Journal of Economics, CXIV (1999), 1359 -1397.
  3. Barro, Robert J., and Xavier Sala-i-Martin, "Convergence," Journal of Political Economy, C (1992), 223-251.
  4. Barro, Robert J., and Xavier Sala-i-Martin, "Technological Diffusion, Conver- gence, and Growth," Journal of Economic Growth, II (1997), 1-26.
  5. Evenson, Robert E., and Larry E. Westphal, "Technological Change and Technol- ogy Strategy," in T. N. Srinivasan and Jere Behrman, eds., Handbook of Development Economics, Vol. 3A (Amsterdam: Elsevier, 1995).
  6. Parente, Stephen L., and Edward C. Prescott, "Technology Adoption and Growth," Journal of Political Economy, CII (1994), 298 -321.
  7. Saint-Paul, Gilles, "Technology Choice, Financial Markets and Economic Devel- opment," European Economic Review, XXXVI (1992), 763-781.

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Authors
Aghion, P., Howitt, P., & Mayer-Foulkes, D.
Affiliations
  • Harvard University (US)
  • Brown University (US)
ORCID
Aghion, Philippe
Venue
Quarterly Journal of Economics
Publisher
Oxford University Press (OUP)
Published
2005-02
Volume
120
Issue
1
Pages
173-222
ISSN
  • 0033-5533 (ISSN-L)
  • 1531-4650
DOI
10.1162/qjec.2005.120.1.173
OpenAlex
W2133207356
Cited by
962
References
115
Citations by year
2026: 11 · 2025: 30 · 2024: 35 · 2023: 48 · 2022: 31 · 2021: 64 · 2020: 56 · 2019: 45 · 2018: 55 · 2017: 52 · 2016: 38 · 2015: 48 · 2014: 59 · 2013: 56 · 2012: 44
FWCI
109.83
Type
journal article
Language
en
Open access
Locations
  • The Quarterly Journal of Economics (publishedVersion)
  • RePEc: Research Papers in Economics (submittedVersion)
  • UCL Discovery (University College London) (submittedVersion)
  • Digital Access to Scholarship at Harvard (DASH) (Harvard University) (submittedVersion, cc-by)
Topics
  • Social Sciences › Economics, Econometrics and Finance › Economics and Econometrics › Economic Growth and Productivity
  • Social Sciences › Economics, Econometrics and Finance › General Economics, Econometrics and Finance › Monetary Policy and Economic Impact
  • Physical Sciences › Computer Science › Information Systems › Economic Growth and Development
Keywords
financial development, economic convergence, Schumpeterian growth, technology transfer, financial intermediation, cross-country growth

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