Joseph Schumpeter argued in 1911 that the services provided by financial intermediaries - mobilizing savings, evaluating projects, managing risk, monitoring managers, and facilitating transactions -stimulate technological innovation and economic development. The authors present evidence that supports this view. Examining a cross-section of about 80 countries for the period 1960-89, they find that various measures of financial development are strongly associated with both current and later rates of economic growth. Each measure has shortcomings but all tell the same story: finance matters. They present three main findings, which are robust to many specification tests: The average level of financial development for 1960-89 is very strongly associated with growth for the period. Financial development precedes growth. For example, financial depth in 1960 (the ratio of broad money to GDP) is positively and significantly related to real per capita GDP growth over the next 30 years even after controlling for a variety of country-specific characteristics and policy indicators. Financial development is positively associated with both investment rate and the efficiency with which economies use capital. Much work remains to be done, but the data are consistent with Schumpeter's view that the services provided by financial intermediaries stimulate long-run growth.

/pdf/finance-and-growth-schumpeter-might-be-right-2yxha5ldj4.pdf

Finance and Growth: Schumpeter Might Be Right

We find support for a negative relation between conditional expected monthly return and conditional variance of monthly return, using a GARCH-M model modified by allowing (1) seasonal patterns in volatility, (2) positive and negative innovations to returns having different impacts on conditional volatility, and (3) nominal interest rates to predict conditional variance. Using the modified GARCH-M model, we also show that monthly conditional volatility may not be as persistent as was thought. Positive unanticipated returns appear to result in a downward revision of the conditional volatility whereas negative unanticipated returns result in an upward revision of conditional volatility. THE TRADEOFF BETWEEN RISK and return has long been an important topic in asset valuation research. Most of this research has examined the tradeoff between risk and return among different securities within a given time period. The intertemporal relation between risk and return has been examined by several authors-Fama and Schwert (1977), French, Schwert, and Stambaugh (1987), Harvey (1989), Campbell and Hentschel (1992), Nelson (1991), and Chan, Karolyi, and Stulz (1992), to name a few. This paper extends that research.

https://faculty.washington.edu/ezivot/econ589/GJRJOF1993.pdf

On the Relation between the Expected Value and the Volatility of the Nominal Excess Return on Stocks

The author argues that the preponderance of theoretical reasoning and empirical evidence suggests a positive first order relationship between financial development and economic growth. There is evidence that the financial development level is a good predictor of future rates of economic growth, capital accumulation, and technological change. Moreover, cross-country, case-style, industry level and firm-level analysis document extensive periods when financial development crucially affects the speed and pattern of economic development. The author explains what the financial system does and how it affects, and is affected by, economic growth. Theory suggests that financial instruments, markets and institutions arise to mitigate the effects of information and transaction costs. A growing literature shows that differences in how well financial systems reduce information and transaction costs influence savings rates, investment decisions, technological innovation, and long-run growth rates. A less developed theoretical literature shows how changes in economic activity can influence financial systems. The author advocates a functional approach to understanding the role of financial systems in economic growth. This approach focuses on the ties between growth and the quality of the functions provided by the financial systems. The author discourages a narrow focus on one financial instrument, or a particular institution. Instead, the author addresses the more comprehensive question: What is the relationship between financial structure and the functioning of the financial system?

/pdf/financial-development-and-economic-growth-views-and-agenda-1isr9l81uu.pdf

Financial development and economic growth : views and agenda

This paper develops a class of recursive, but not necessarily expected utility, preferences over intertemporal consumption lotteries An important feature of these general preferences is that they permit risk attitudes to be disentangled from the degree of intertemporal substitutability Moreover, in an infinite horizon, representative agent context these preference specifications lead to a model of asset returns in which appropriate versions of both the atemporal CAPM and the intertemporal consumption-CAPM are nested as special cases In our general model, systematic risk of an asset is determined by covariance with both the return to the market portfolio and consumption growth, while in each of the existing models only one of these factors plays a role This result is achieved despite the homotheticity of preferences and the separability of consumption and portfolio decisions Two other auxiliary analytical contributions which are of independent interest are the proofs of (i) the existence of recursive intertemporal utility functions, and (ii) the existence of optima to corresponding optimization problems In proving (i), it is necessary to define a suitable domain for utility functions This is achieved by extending the formulation of the space of temporal lotteries in Kreps and Porteus (1978) to an infinite horizon framework A final contribution is the integration into a temporal setting of a broad class of atemporal non-expected utility theories For homogeneous members of the class due to Chew (1985) and Dekel (1986), the corresponding intertemporal asset pricing model is derived

Substitution, Risk Aversion, and the Temporal Behavior of Consumption and Asset Returns: A Theoretical Framework

ARCH modeling in finance: A review of the theory and empirical evidence

Exchange rates and traded goods prices

https://www.nber.org/system/files/working_papers/w4438/w4438.pdf

International evidence on tradables and nontradables inflation

Saving and the real interest rate in LDCs

This paper presents an analysis of the theoretical underpinnings and the relevance of the phenomenon of financial repression from a public-finance perspective. The analysis explicitly accounts for the interaction between capital controls and financial repression. The proposed empirical estimate of the revenue from financial repression is based on the difference between the domestic and the foreign cost of borrowing of the government. The correlations of the revenue from financial repression with inflation, exchange rates and per-capita income are discussed.

https://papers.ssrn.com/sol3/Delivery.cfm/nber_w3604.pdf?abstractid=227435&mirid=4

Government Revenue from Financial Repression

Preface Introduction Jeffrey A. Frankel, Giampaolo Galli, Alberto Giovannini. 1: Risk and Turnover in the Foreign Exchange Market Philippe Jorion Comment: Bernard Dumas 2: Bid-Ask Spreads in Foreign Exchange Markets: Implications for Models of Asymmetric Information David A. Hsieh, Allan W. Kleidon. Comment: Zhaohui Chen Comment: Antti Suvanto 3: Interdealer Trade and Information Flows in a Decentralized Foreign Exchange Market William Perraudin, Paolo Vitale. Comment: Silverio Foresi Comment: Alan Kirman 4: One Day in June 1993: A Study of the Working of the Reuters 2000-2 Electronic Foreign Exchange Trading System Charles Goodhart, Takatoshi Ito, Richard Payne. Comment: Richard K. Lyons 5: Foreign Exchange Volume: Sound and Fury Signifying Nothing? Richard K. Lyons Comment: Mark D. Flood Comment: Antonio Mello 6: Dynamic Hedging and the Interest Rate Defense Peter M. Garber, Michael G. Spencer. Comment: Richard K. Lyons 7: Heterogenous Behavior in Exchange Rate Crises Fabio C. Bagliano, Andrea Beltratti, Guiseppe Bertola. Comment: Lorenzo Bini-Smaghi Comment: Richard K. Lyons 8: Exchange Rate Economics: What's Wrong with the Conventional Macro Approach? Robert P. Flood, Mark P. Taylor. Comment: Andrew K. Rose Comment: Lars E. O. Svensson 9: Is There a Safe Passage to EMU? Evidence on Capital Controls and a Proposal Barry Eichengreen, Andrew K. Rose, Charles Wyplosz. Comment: Jose Vinals Contributors Author Index Subject Index

Alberto Giovannini

Papers

Exchange rates and traded goods prices

International evidence on tradables and nontradables inflation

Saving and the real interest rate in LDCs

Government Revenue from Financial Repression

The Microstructure of Foreign Exchange Markets